THE CATHOLIC UNIVERSITY OF EASTERN AFRICA

Mission Statement:
Inspired by Jesus words; Consecrate them in truth (Jn: 17:17) CUEA seeks to promote scientific research, quality
teaching and community service for the purpose of enhancing Christian living.

FACULTY OF COMMERCE
Faculty Mission:
To be a leading centre of excellence in the provision of quality business education and managers, researchers and
community service based on Christian principles.

Department of Accounting and Finance

COURSE OUTLINE
Unit Code: CEC412 Unit Title: Economics of Development
Academic Year: 2011/2012

Credit Hours: 45

Trimester: First, Second & Third

Class Hours & Room No.: Wednesday11.00 a.m.-2.00 p.m. RH11 and Friday 5.30 a.m. - 8.30
a.m. JH 18.
Lecturer: Dr. Gabriel N. Kirori
Hours of Consultation: Tuesday 11.00 a.m.-3.00 p.m.; Friday 9.00 a.m.-10.30 a.m. ; 2-4 p.m ;
KH, 4th Foor, Room No. 6
Prerequisite : None
Purpose of the Course:
The course aims at introducing the subject of economics of development, with special focus on
the less development countries (LDCs), to undergraduate commerce students
Course Description:
This course covers a range of topics including the economics of underdevelopment,
economic growth and development, sustainable development, development
economics in retrospect, income distribution, and theories of development. It
discusses the measurement of economic development, criteria for
underdevelopment and characteristics of an undeveloped country, obstacles to
economic development and factors for economic growth, objectives and policies of
sustainable development, the Classical and Marxian models of economic
development.

Learning Outcomes:
After successful completion of the course the students will be expected to have good and clear
understanding why some countries are said to be less developed while others are developed. The
students will also be expected to identify clearly strategies and policies that promote economic
development.

Class schedule
Week 1

Contents

Week 2

Economics of Underdevelopment
Different criteria of underdevelopment.
Characteristics of an undeveloped country.

Week 3&4

Economic Growth and Development

Obstacles to economic development.
Factors of economic growth.
Characteristics of modern economic growth.

Week 5& 6

Sustainable Development
Meaning of sustainable development.
Objectives of sustainable development.
Environmental problems facing LDCs.
Causes of environmental degradation.
Policies for sustainable development.
Measuring sustainable development.
Development Economics in Retrospect
GNP per capita [output or growth approach].
Employment creation [employment creation
strategy, income inequality strategy, basic human
needs strategy].
Stabilization and structural adjustment.
Human capabilities.
Human development.
Sustainable development.

Week 6 & 7

Week 7
Week 8&9

Introduction
Concepts and approaches.
Distinction between economic growth and economic
development.
Measurement of economic development.

CAT
Economic Growth and Income Distribution
The inverse U-shaped hypothesis.
Measuring income inequality.
2

Week 9&10

Week 10&11

Some

Some

Inequality and development.

Theories of Development
The classical model and its limitation.
Rostows stages of economic growth.
Marxian model of economic growth.
The Big Push model.
Growth Models
The Harrod-Domar models.
The Solow model of long-run growth.

Week 11&12

Development Planning
The nature of economic planning and role in world
economies (market economies, command
economies, mixed economies).
The rationale for planning in LDC economies (market
failure argument, resource mobilization and
allocation argument, attitudinal or psychological
argument, the foreign aid argument).
The nature of development planning (the aggregate
growth model, the sectoral projection model, the
comprehensive inter-industry model).

Week 13
Week 14

Revision
Final Examination

Required texts for the course

1. Jhingan, M. L [2009], The Economics of Development and Planning, 39th
Edition, Vrinda Publications (P) Ltd. Delhi, India.
2. Todaro, M. P. [1980], Economics for a Developing World: An
introduction to principles, problems and policies for development,
Longman Group Limited, London. U.K.
Teaching Methodologies

Lecturing

Group discussion

Student presentation

PowerPoint presentation

Course Assessment
3

Students registered for the unit are required to complete all CATs which will comprise 30% (15%
CAT 1 and 15% CAT 2) of the final grade and the final end of the trimester examination will
comprise 70%. If a student failed to do the CAT or the final examination, the result is reported as
I (incomplete).
Policy Issues
i)

All students should attend all classes and actively participate

ii)

If a student fails to attend more than six (6) hours in a trimester he/she will not e
allowed to sit for the final examination (this also applies to tardiness).

iii)

Students with special needs are required to see the unit instructor and discuss their
needs.

iv)

Students repeating or auditing the unit must inform the instructor.

v)

All mobile phones must be switched off during class hours.

vi)

If a student is late for 10 minutes, he/she is not allowed to enter the class.

Topic One: INTRODUCTION

1.1
Concepts and Approaches
Economics of development refers to the problems of the economic development
of underdeveloped countries. Study of economic development upto 1940s
related to Western European framework of social and cultural relations. Attention
towards analyzing the problems of underdeveloped countries and formulating
theories and models of development and growth started only in 1940s especially
after the Second World War. Interest in the economics of development arose as
result of: (1) desire by leaders to promote rapid economic development, and (2)
realization by developed nations that poverty anywhere is a threat to prosperity
everywhere. Interest of the wealthy nations in removing widespread poverty of
the underdeveloped countries has be aroused by: (1) humanitarian motive, and
(2) the cold war between Russia and the West before the collapse of the Soviet
Union, each trying to enlist the support and loyalty of underdeveloped countries
by promoting larger aid than the other.
1.2
Economic Growth and Economic Development
Economic growth means more output. Growth involves
More output derived from greater amounts of inputs.
Greater efficiency, i.e., an increase in output per unit of input.
Economic growth is related to a quantitative sustainable increase in per capita
output or income accompanied by expansion in its labourforce, consumption,
capital and volume of trade.
Economic development implies both growth and changes in the technical and
institutional arrangement y which the output is produced and distributed.
Development goes beyond growth to imply changes in the composition of output
and allocation of inputs by sectors. Economic development is a wider concept
than economic growth and is taken to:
Mean growth plus change. It is related to qualitative changes in
economic wants, goods, incentives, institutions, productivity and
knowledge or the upward movement of the entire social system.
Embraces both growth decline; an economic can grow but it may not
develop because poverty, unemployment and inequalities may continue
to persist due to absence of technological and structural changes.
1.3
Measurement of Economic Development
Economic development is measured in four ways.
1. GNP Approach. One of the methods to measure economic development is in
terms of an increase in the economys real national income over a long period
of time. GNP is not a satisfactory measure due to the following reasons:
(a) Fails to take into consideration changes in the growth of population. If
arise in real national income is accompanied by a faster growth in
population, there will be no economic growth but retardation.
(b) GNP figure does not reveal the costs to society of environmental pollution,
urbanization, industrialization, and population growth.
(c) GNP tells nothing about the distribution of income in the economy.
(d) Conceptual difficulties in the measurement of GNP.
5

2. GNP per Capita Approach. The second measure of economic development

relates to an increase in the per capita real income or output of the economy
over the long period. Drawbacks of this measure include:
(a) There is possibility of the masses remaining poor despite an increase in
the real GNP per capita if the increased income goes to the few rich
instead of going to the many poor.
(b) Fails to measure adequately changes in output due to changes in price
level
(c) Fails to reveal the structure of the society, the size and composition of its
population, its institutions and culture, the resource patterns and even
distribution of output among the societys members.
(d) Fails to taken into account problems associated with basic needs like
nutrition, health, sanitation, housing, water and education.
Despite these limitations, the GNP per capita is the most widely used
measure of economic development.
3. Welfare Approach. There is also a tendency to measure economic
development from the point of view of economic welfare. Limitations include:
(a) The weights to be attached to the consumption of individuals because
consumption of goods and services depends on the tastes and
preferences of individuals, thus it is not correct to have the same weights
in preparing the welfare index of individuals.
(b) Difficulty in the valuation of output- output may be valued at market
prices whereas economic welfare is measured by an increase in real
national output or income.
4. Social Indicators Approach. Inputs such as nutritional standards or number of
hospital beds or doctors per head of population; outputs corresponding to
these inputs such as improvements in health in terms of infant mortality
rates, sickness rates, etc.
Social indicators are often referred to as the basic needs for development.
Basic needs focus on alleviating poverty by providing basic human needs to
the poor. The direct provision of such basic needs as health, education, food,
water, sanitation and housing affects poverty in a shorter period and with
fewer monetary resources than GNP and/or GNP per capita strategy, which
aims at increasing productivity and incomes of the poor automatically over
the long run. Basic needs lead to a higher level of productivity and income
through human development in the form of educated and healthy people.

Six social indicators for basic needs

Basic need

Indicator

Health
Education
Food
Water supply
Sanitation
Housing

Life expectancy
Literacy signifying primary school enrolment as percent of
population
Calorie supply per head
Infant mortality and percentage of population with access to
portable water
Infant mortality and percentage of population with access to
sanitation
None

Limitations
(a) Problem of assigning weights to various items which may depend on
social, economic and political set-up, involves subjectivity.
(b) Majority of indicators are inputs and not outputs, e.g., education, health.
(c) They involve value judgments
(d) There is no consensus and/or unanimity among economists as to the
number and type of items to be included in such an index.

Topic Two: ECONOMICS OF UNDERDEVELOPMENT

2.1 Definition/Features of Underdevelopment
Underdevelopment can be defined in many ways:
1. The incidence of poverty, ignorance, or disease.
2. Misdistribution of national income.
3. Administrative incompetence.
4. Social disorganization.
There is no single definition which is comprehensive as to incorporate all the
features of an underdeveloped country.
2.2 Some Criteria of Underdevelopment
Criteria of underdevelopment include the following:
1.
The ratio of population to land area. It is very difficult to ascertain whether
a high or low ratio of population to area is an indicator of
underdevelopment. This criterion is vague and superfluous. For example
SSA has a low ratio, thus is underdeveloped according to the criterion;
India has a high ratio, implying developed according to the criterion, yet
India is ranked among the underdeveloped countries.
2.
Ratio of industrial output to total output; ratio of industrial population to
total population. A low ratio indicates underdeveloped. However, this ratio
tends to increase with the increase in the per capita income. Therefore,
the degree of industrialization is often a consequence rather than a cause
of economic prosperity in a country.
3.
Poverty as the main cause of underdevelopment; cf: the basic criterion of
underdevelopment is mainly low per capita income.
4.
One of the most commonly acceptable criteria of underdevelopment is the
low per capita real income of underdeveloped countries as compared with
the advanced countries. But definitions which explain underdevelopment
in terms of low per capita level of income are not adequate or satisfactory,
for they focus attention only on one aspect of underdevelopment, namely
poverty. They do not analyze the causes of: low consumption levels,
inhibited growth, and development potential of an underdeveloped
economy.
2.3 Characteristics of an Undeveloped [underdeveloped] Country.
1. General poverty
An underdeveloped country is poverty-ridden. Poverty is reflected in low GNP
per capita. The extremely low GNP per capita of low-income economies
reflects the extent of poverty in them. It is not relative poverty but absolute
poverty that is more important in assessing low-income economies. Absolute
poverty is measured by: low income, malnutrition, poor health and clothing
and shelter, and lack of education. Absolute poverty is reflected in low living
standards of the people. Food, a major item of consumption and 80 percent
of income is spent on it in underdeveloped countries as compared with 20
8

2.

3.

4.
5.
6.

percent in advanced countries. People mostly take cereals and other starches
to the total absence of nutritional foods. The rest of the consumption consists
mainly of thatched huts and almost negligible clothing. People live in
extremely insanitary conditions; no safe drinking water, no sanitary waste
disposal. Thus, in these countries poor nutrition, unsafe water, poor
sanitation, uninformed parents, and lack of immunization imply high infant
and under-five mortality rate. The countries also face low doctor ratio per
head of population, inadequate educational facilities. Thus, the vast majority
of the people in LDCs are ill fed, ill clothed, ill-housed, and ill-educated
because of poverty.
Agriculture, the main occupation
Two-thirds or more of the people in LDCs live in rural areas and their main
occupation is agriculture. There is heavy concentration in agriculture in LDCs
at more than 70 percent compared to 3-4 percent in developed, a symptom
of poverty. Agriculture, main occupation is unproductive, carried out in an old
fashion with obsolete and outdated methods of production. Low average land
holdings as low as 1-3 hectares; yield from land is precariously low; and
subsistence agriculture. Countries mainly specialize in the production of raw
materials and foodstuff; some specialize in non-agriculture primary
production, i.e., minerals. An underdeveloped country is thus a primary sector
economy. Besides the primary sector there is underdeveloped secondary
sector with few simple, light and small consumer good industries and equally
underdeveloped tertiary sector.
A dualistic economy
Almost all LDCs have a dualistic economy: firstly, characterized by the urbanrural set-up (1) the market economy -- in and near the towns is developed;
ultra modern with the amenities of life; and (2) the subsistence economy in
the rural areas is less developed; is backward mainly agriculture-oriented.
Secondly, characterized by the existence (1) an advanced industrial system
uses capital-intensive techniques and (2) an indigenous backward agricultural
system; rural sector uses traditional techniques. Both of these dualistic
system types perpetuate unemployment and disguised unemployment. The
LDCs are also characterized by financial dualism consisting of: (1) the
organized money market charging very high rates on loans, and (2) the
organized money market with low interest rates and abundant credit
facilities.
Underdeveloped natural resources. This is in the sense that the natural
resources are un-utilized, under-utilized, and mis-utilized.
Demographic features. Diversity exists in the size, density, age-structure, and
rate of growth of population.
Unemployment and disguised employment. There is vast open
unemployment and disguised employment. Unemployment is spreading with
urbanization but industrial sector has failed to expand along with the growth
of labour force thereby increasing urban unemployment. There are the
educated unemployed who fail to get jobs due to structural rigidities and the
9

lack of manpower planning. Underemployment or disguised or concealed

unemployment is a notable feature of underdeveloped; is not voluntary but
involuntary. People are prepared to work but they are unable to find work
throughout the year due to lack of complementary factors; underemployment
is found among rural landless and small farmers due to the seasonal nature
of farm operations and insufficient land and equipment to keep them fully
employed. A person is said to be disguised unemployed if his contribution to
output is less than what he can produce by working for normal hours per day.
His marginal productivity is nil or negligible, and by withdrawing such
labourers, farm output can be increased.
7. Economic backwardness
Particular manifestations of economic backwardness are low labour
efficiency; factor immobility; limited specialization in occupation and trade;
economic ignorance; values and social structure that minimize the incentives
for economic change. The basic cause of backwardness is to be found in low
labour productivity as compared with the developed countries. This low
labour efficiency results from general poverty, which reflected, in low
nutritional standards; ill health; illiteracy and lack of training; and
occupational mobility, etc.
8. Lack of enterprise and initiative
Another characteristic feature of underdeveloped countries is lack of
entrepreneurial ability. Entrepreneurship inhibited by the social system, which
denies opportunities for creative faculties. The force of custom, the rigidity
of status and the distrust of new ideas and of the exercise of intellectual
curiosity, combine to create an atmosphere inimical to experiment and
innovation. In addition, the small size of the market, lack of capital, absence
of freedom of contract and law and order, hamper enterprise and initiative. In
addition, few entrepreneurs are engaged in the manufacture of some
consumer goods. The thin supply of entrepreneurs is also attributed to the
lack of infrastructural facilities, which add to the risk, and uncertainity of new
entrepreneurship. Further, entrepreneurship is hindered by technological
backwardness in underdeveloped countries. This reduces output per man and
the products are of substandard quality.
9. Insufficient capital equipment
This is another general characteristic of such countries [underdeveloped].
Underdeveloped countries are characterized as capital poor or low-capital
and low-investing economies. This implies that the countries have extremely
small capital stock as well as low current rate of capital formation at about 56 percent of GNP gross investment compared to 15-20 percent in developed
countries. The root cause of this capital deficiency is the problem of undersaving, i.e., under-investment in productive instruments capable of increasing
their rate of economic growth. [There are extreme inequalities in the
distribution of incomes of LDCs]. The saving ratio does not rise with the
increased level of incomes in the long run due to demonstration effect. This
10

happens when in everybody there is a great urge to keep with the Joneses,
i.e., to imitate the standard of living of our prosperous neighbours. There is
tendency to emulate the higher consumption standards of advanced
countries.
10.Technological backwardness [The backward state of technology]
The technological backwardness of LDCs is reflected in:
(i) High average cost of production despite low money wages,
(ii) High labour-output and capital-output ratios as a rule given constant
factor prices thus reflecting a generally low productivity of labour and capital,
(iii) Predominance of unskilled and untrained workers, and
(iv)The large amount of capital equipment required to produce national
output. Thus, technological backwardness is the cause and result of economic
backwardness. This technological backwardness is due to technological
dualism, which implies the use of different production functions in the
advanced sector and the traditional sector of the economy.
11.Foreign trade orientation
Underdeveloped economies are generally foreign trade oriented. This
orientation is reflected in: (i) Exports of primary products, and
(ii) Imports of consumer goods and machinery. Too much dependence on
exports of primary products leads to serious repercussions on their
economies.

11

Topic Three: ECONOMIC GROWTH AND DEVELOPMENT

3.1
Obstacles to Economic Development
a. Vicious circles of poverty
There are circular relationships known as the vicious circles of poverty that
tend to perpetuate the low level of development; forces that act and react
upon one another in such a way as to keep a poor country in a state of
poverty. For example,
A poor man that does not have enough food to eat.
Being underfed, his health may be weak
Being physically weak, his working capacity is low, which means that
he will not have enough to eat; and so on.
The basic vicious circle stems from the fact that in LDCs, total productivity is
low due to deficiency of capital, market imperfections, economic
backwardness and underdevelopment. The vicious circles operate on both the
demand side and the supply side. The demand side of the vicious circles is
that the low level of real income leads to a low level of demand, which, in
turn, leads to a low rate of investment and hence back to deficiency of
capital, low productivity and low income.
Low productivity
Capital
deficiency
low income

low income

low productivity
capital deficiency

low investment
low savings
low demand
Figure: The demand side of the vicious circle
vicious circle

low investment
Figure: The supply side of the

Low productivity is reflected in low real income

The low level of real income means low saving
The low level of saving leads to low investment and deficiency of capital
The deficiency of capital, in turn, leads to a low level of productivity and back
to low income.

b. Low rate of capital formation

The most pertinent obstacle to economic development is shortage of capital. This
stems from the vicious circles of poverty. Poverty is both a cause and a
consequence of a countrys low rate capital formation. Low productivity leads to low
real income, low saving, low investment, and a low rate of capital formation.
c. Socio-cultural constraints
12

Economic development has much to do with human endowments, social attitudes,

and political conditions besides capital. Capital is necessary but not a sufficient
condition of progress. Social institutions display such attitudes as are not conducive
to economic development. Elements of social resistance to economic change
include such factors as:
Traditional beliefs and values
Attitudes involving inferior valuation attached to business roles.
Factionalism, the tendency of the society to be divided by caste and class
cleavages, ethnic or religious distinctions.
Differences in cultural tradition and social pattern, kinship loyalties and
regional identification.
These factors tend to inhibit social and geographical mobility and constitute a drag
on progress.
d. Agricultural constraints
This obstacle relates to the agricultural sector. Most LDCs are predominantly
agricultural. Agricultural production constitutes a large share of their GDP and
agricultural commodities form a considerable part of the value of their total exports.
Thus, a poor performance of the agricultural sector is a major constraint on growth
of the LDCs.
e. Human resources constraint
Undeveloped human resources are an important obstacle to economic
development. Undeveloped human resources are manifest in low labour
productivity, factor immobility, and limited specialization in occupation, customary
values and traditions that minimize incentives for economic development.
f. Foreign exchange constraint
Balance of payments [BoP] difficulties, i.e., unfavorable BoP. This is because of:
Low inflow of aid and foreign direct investment low net inflow of foreign
capital
Shortages of foreign exchange reserves
Debt services problems
Unfavorable BoP becomes a severe limitation of economic development
programmes.
3.2 Factors of Economic Growth
Factors of economic growth are broadly categorized as (a) economic factors and (b)
non-economic factors
Economic factors
Factors of production are regarded as the main economic forces that determine
growth. The growth ate of the economy rises or falls as a consequence of changes
in them. These include the following:
a. Natural resources or land including:
13

 The fertility of land, its situation and composition

Forest wealth
Water resources
Minerals
Climate
Etc.
For economic growth, the existence of natural resources in abundance is
essential. In most of the LDCs, natural resources are either un-utilized, underutilized, or mis-utilized. This is one of the reasons for their backwardness.
The presence of abundant resources is not sufficient for economic growth.
What is required is their proper exploitation. If the existing resources are not
being properly exploited, the country cannot develop.
b. Capital accumulation (or capital formation)
Capital formation is the second important economic factor for economic
growth. Capital means the stock of physical reproductive factors of
production. Capital formation is the main key to economic growth; it reflects
effective demand and it creates productive efficiency for future production.
The process of capital formation leads to increase in national output, that is,
it raises production and employment opportunities as well as specialization
and economies of large-scale production. Capital formation helps in producing
machines, tools and equipment for raising labour force; helps provision of
social and economic overheads like transport, power, education, etc; leads to
the exploitation of natural resources, industrialization and expansion of
markets which are essential for economic progress. Organization is an
important part of the growth process and relates to the optimum use of
factors of production in economic activities.
c. Organization
Organization is complement to capital and labour and helps in increasing
their productivities. In modern economic growth, the entrepreneur has been
performing the task of an organizer and undertaking risks and uncertainties.
d. Technological progress (change)
Technological change is regarded as the most important factor in the process
of economic growth and is related to changes in the methods of production,
which are the result of some new technique of research or innovation.
Changes in technology lead to increase in the productivity of labour, capital
and other factors of production.
e. Specialization and Division of labour and scale of production
Specialization and division of labour lead to increase in productivity; they lead
to economies of large-scale production which further help in industrial
development. They increase the rate of economic development. Division of
labour leads to improvement in productive capacities of labour; every labour
14

becomes more efficient than before. He/she saves time. He/she is capable of
inventing new machines and processes in production. Ultimately, production
increases manifold.
f.

Structural changes
Structural change is another crucial factor for economic growth; it implies
radical transformation of existing institutions, social attitudes, and
motivations. Structural changes lead to increasing employment opportunities,
higher labour productivity and the stock of capital, exploitation of new
resources and improvements in technology.

Non-economic Factors for economic growth

These include
a. Social factors
In LDCs, social attitudesthe totality of beliefs, values, institutions that
cause human behavior to be what it is [values refer to motivation of human
behavior towards particular ends] are not conducive to economic
development. For instance
R eligion gives less inducements to virtues of thrift
People are not hardworking as majority are influenced more by
traditional customs and place high values to leisure, contentment
and participation in festivals and ceremonies.
Social attitudes stand in the way of development when money is wasted
on non-economic ventures. Social organizations like the kinship and joint
family should be modified so that they may be more favourable to
development.
b. Human factor
Human resource has been an important factor in modern-economic growth.
Economic growth does not depend on the mere size of human resource but
also on their efficiency. Development of the human factor is reflected in the
increased efficiency or productivity of their labourforce; this is called human
capital formation, which is the process of increasing knowledge, the skills,
and the capacities of all people of the country. The process of human capital
formation includes expenditure on health, education, and generally on social
services.
c. Political and administrative factors
Political and administrative factors help in modern economic growth. These
factors essentially include clean administration and stable political conditions
which are a prerequisite for creating conducive environment for:
Peace, stability and legal protection, which encourage
entrepreneurship.
Technical progress, factor mobility and large size of market, which
help, stimulate enterprise and initiative.
15

A government must offer society the services if it desires to stimulate

economic development; these services include: order, justice, police and
defense, rewards commensurate with ability and application of production,
security in the enjoyment of property, assurance that business covenants and
contracts will be kept, provision of standards of weights, measures and
currency, as well as stability of government system itself.

3.3 Characteristics of Developed Countries

Characteristics of modern economic growth
Meaning
Modern economic growth refers to the development of developed countries
- Western Europe
- US
- Canada
- Australia
- Japan
Economic growth
Economic growth is a long-term rise in the capacity to supply increasingly diverse economic
goods to its population. This growing capacity based on advancing technologies as well as
institutional development and ideological adjustments. Economic growth is identified by:
1.
The sustainable increase in the supply of goods
2.
Advancing technology and determining the growth of capacity in supplying diverse
3.

goods to the population.

Institutional and ideological adjustments to affect peoples use of innovation
generated by advancing stock of human knowledge.

Characteristics of modern economic growth

Kuznets identifies six characteristics of modern economic growth as revealed by the experience
of the developed countries since late 18th century and early 19th century. These characteristics are
in pairs of three as follows:
1. Two are quantitative that relate to national product and population growth.
2. Two relate to structural transformation.
3. Two relate to international spread.

3.3.1 Quantitative Characteristics Related to National Product and Population Growth

16

a. High rates of growth of per capita product and population

Modern economic growth is characterized by the high rate of increase in per capita product and
high rates of population growth
Growth rate in per capita product [per decade]
France 16-19
UK 13.5-14.1
Sweden 28.3
Italy 16-19
USSR 43.9
Switzerland 16-19
Norway 16-19
Denmark 16-19
Wes Germany 16-19
Japan 26
Netherlands 13.5-14.1
Canada 16-19
USA 16.19
Australia - 8

growth rate in population

2.5

6-7
8

10-14

19-24

High rates of growth of per capita product and population imply high rates of increase in total
product.
b. The rise in productivity
Modern economic growth is characterized by a rise on the rate of per capita product due to
primarily to improvements in the quality of inputs which led to greater efficiency or rise in
productivity per unit of input. Increase in input of resources of labour and capital or increase in
efficiency or both; increase in efficiency implies greater output per unit of input.
The growth of national product has been due to enormous addition to population which led to a
large increase in labour force. The increase in national product in turn led to a considerable
increase in capital accumulation and hence reproducible capital.
Economic growth of developed nations has been accompanied by the long-term decline in
number of man-hours per capita. This tendency reflects increase in efficiency or productivity.

3.3.2 Characteristics Related to Structural Transformation

a. High rate of structural transformation
Structural transformations in modern economic growth include the shift away from:
17

1. Agriculture to non-agricultural activities

Decline of the share of the agricultural sector in total product, for instance: a
decline from 22% in 1841 to 5% in 1955 in Great Britain; from 42% in 1872-82
to 9% in 1962 in France; from 49% in 1879 to 9% in 1939-78 in the USA; from
63% in 1878-82 to 14% in 1962 in Japan.
Agricultural sector
Great Britain 5
, USA 12, Australia 17, Denmark 19, Sweden 19, Canada
19
2. Industry to services
Increase in share of the industrial sector to more than 50%, for instance: Great
Britain 56%; France 52%; Germany 52%; Netherlands 51%; Norway 53%;
Sweden 55%; USSR 58%. 22-49% Italy, Australia, USA, Denmark, Canada, and
Japan.
Industrial sector
Ranged between 40-58% for all countries, except Japan and the USSR, late
comers in the field of industrialization
3. Personal enterprises to impersonal organization of economic firms.
4. A change in the scale of productive units
5. A change in the occupational status of labour
The rapidly of structural transformation modern economic growth can also be
illustrated by the change in the distribution of labour force among the three major
sectors
Service sector
Share of the services sector in total labour force
Constant or little in: Great Britain, Belgium, Netherlands, Sweden, Australia.
Marked absolute and relative increase in: Switzerland, Denmark, Norway, Italy,
USA, Canada, Japan, and USSR.
b. Urbanization
Modern economic growth has been characterized by the movement of an increasing proportion
of the population in developed countries from rural areas to urban areas. This is urbanization.
Urbanization is largely a product of industrialization where economies of scale arising from nonagricultural pursuits following technological changes led to the movement of a large proportion
of labour, population, from the rural to the urban areas and more effective transportation,
communication, and organization.
Affecting the grouping of population by social, economic status
Transforming the basic pattern of life
18

The effects of urbanization on modern economic growth of developed nations led to the decline
in birth rate and the shift toward the small family.
Urbanization affected the level and structure of consumer expenditure in developed countries in
three ways:
1. Urbanization led to
An increasing division of labour
Growing specialization
The shift of many activities from non-market oriented pursuits within the family
or the village to specialized market-oriented firms
Example
Much food processing, tailoring, dress-making, and building and repairing of houses was one
time done within the household or by communal efforts within the village and today a large part
is performed by business firms with the urbanized modern society.
2. Urbanization made the satisfaction of an increasing number of wants more costly. This
created difficulties of: housing, sanitation, water, intracity and city transportation as well
as similar basic amenities in the cities.
These are the extra costs of urban life which increased consumer expenditure on different types
of consumer goods.
3. The demonstration effect of the city life led to imitation of consumption patterns by the
large immigrants, which led to increased consumer expenditure.
3.3.3 Characteristics Related to International Spread
a. The outward expansion of developed countries
The growth of developed countries has been most unequal. Modern economic growth occurred in
some nations earlier than it did in others. This was largely due to differences in historical
backgrounds and antecedents. Thus, when modern science and knowledge developed, Industrial
Revolution occurred first in England in the second half of 18th century and later on, it spread to
other countries of Europe.
Modern economic growth was concentrated in European countries or their offshoots overseas
until the entry of Japan in late 19th century and the USSR in the 1930s.

19

The outward expansion of developed countries with their European origin has primarily been due
to the technological revolution in transportation and communication. This led to:
More direct political dominance over the colonies.
The opening up of previously closed areas like Japan.
The partition of undivided areas like SSA.
The partition of SSA and greater political dominance over the colonies were due to the revival
of imperialism which was responsible for the outward expansion of developed countries like
Germany ad USA in the last quarter of the 19th century.
Thus, the political power element in international relations is an important factor in the spread of
modern economic growth. There was an ever-increasing interdependence among nations because
of the potential of closer contact and the sharing of same transactional stock of knowledge. Such
dependence led to the spread, in developed nations, of modern education that increased their
capacity to exploit and contribute to the available stock of knowledge. An important element in
this was the use of a common language leading to sharing a common body of knowledge and
techniques.
Modern economic growth failed to spread to LDCs due to two factors:
1. Such countries do not possess a stable political and social framework which may
accommodate rapid structural changes and encourage growth-promoting groups in
society.
2. The colonial policies followed by the developed countries limited political and economic
freedom of LDCs
As a result, LDCs home failed to take advantage of the spread of modern economic growth and
have continued to remain backward
b. International flows of men, goods, and capital
The international flows of men, goods and capital increased from the second quarter of the 19th
century to First World War (WWI) but decline began with WWI and continued to the end of
WWII. But there has been rise in some of these flows since the early 1950s.

Migration (international flow of men)

The cumulative and increasing volume of international migration since the late 1840s and
continuing to WWI has an important bearing upon the patterns of modern economic growth.
The factors which led to international migration were the:

20

Easing of intercontinental transportation by steamship and intra-continental migration in

Europe by railways but migration flows to the USA were due to the pull of better

economic conditions.
The push factor in the long-run created progressive impact of the dislocation produced by
the modernization of agriculture as industry in Europe. This push factor was primarily
responsible for intercontinental migrations from Europe to North and South America, to
European colonies in Africa and Offshoots in Oceania.

Flow of goods
Foreign commodity trade has been by far the most dominant component of outward expansion of
the developed countries. Two treads are observed in this regard
1. The high rate of growth of world trade between 1820s and 1913.
2. The share of the few developed countries in world foreign trade has been high between
1820s and 1913.
Four factors that led to the greater increase in growth of foreign trade than of domestic output
over the decades before the WWI in developed countries:
1. The revolution in transportation of commodities with the development of steam railroads
and ocean transportation.
2. The decision by the United Kingdom to develop free trade and international division of
labour.
3. The relaxation of trade barriers by all the developed countries.
4. The opening of the West in: US, Canada, Australia, and Argentina, leading to European
specialization in industry.
Flow of capital
International flow of foreign capital investments grew rapidly from the 2nd quarter of the 19th
century to WWI. Three major exporters of capital were Great Britain, France, and Germany. A
substantial portion of capital flows went to developed countries and was based on political rather
than economic considerations.
Great Britain foreign investments were within the Empire
French foreign investment flowed to: Russia, Turkey, Balkan States, Austria-Hungary,
Her colonies
Germany investments flowed to: Austria-Hungary, Turkey, Russia, Balkan States.

21

Topic Four: SUSTAINABLE DEVELOPMENT

4.1 Concept of Recent Origin
Term SD first used by the World Conservation Strategy in 1980 by the International Union for
the Conference of Nature and Natural Resources; Commonly used and defined for the first time
by the Brundtland Report, entitled Our Common Future, of the World Commission on
Environment and Development in 1987.
4.2 Meaning of Sustainable Development
It has many definitions but the most popular definition by the Brundtland Report is meeting the
needs of the present generation without compromising the needs of future generations; means
that development should keep going. It emphasizes the creation of sustainable improvements in
the quality of life of all people through
Increases in real income.
Improvements in education, health, and general quality of life
Improvements in quality of natural environmental resources.
Thus, sustainable development in closely linked to economic development; it is a situation in
which economic development does not decrease overtime. Sustainable development is
development that is everlasting and contributes to the quality of life through improvements in
natural environments. Natural environments, in turn, supply utility to individuals, inputs to the
economic process and services that support life. Thus, sustainable development describes a
process in which natural resource base is not allowed to deteriorate.
4.3 Objectives of Sustainable Development
The overall aim of SD is the creation of sustainable improvement in the quality of life for all
people as the principle goal of development policy; aims at accelerating economic development
better in order to conserve and enhance the stock of environmental, human and physical capital
without making future generations worse off.
4.4 Environmental Problems Facing LDCs
The environmental problems of a country depend on its stage of development, economic
structure, production techniques in use and its environmental policies. For instance, the LDCs
face the problems of inadequate sanitation and clean drinking water due to lack of economic
development while developed countries suffer from air and water pollution due to
industrialization.
The following are some of the environmental problems facing the less developed countries:
1. Air pollution
Urbanization, which is the concomitant result of economic development and industrial growth,
has led to atmospheric pollution. Increasing vehicular traffic is the most important source of air
pollution in big cities.
22

The problem of industrial pollution is acute in areas where petroleum refineries, chemicals, iron
and steel, non-metallic products, and paper, textile industries are concentrated.
People residing in shantytowns, slums and poorly ventilated houses and using household stoves,
wood and coal for cooking further increase air pollution.
Thus, air pollution is a serious problem in cities and urban manufacturing areas. There is
particulate matter in the form of dirt, dust and solid waste thrown in the air that is harmful for
humans, animals and plants. Acid rain on forests and water bodies destroys them in the long run.
2. Water pollution
Water pollution, is similarly a result of economic growth. The main source of water pollution are
flushing waste down the domestic sewage, industrial effluents containing organic pollutants, and
wastes of chemicals, heavy metals and mining activities. The major water polluting industries are
refineries, fertilizers, pesticides, chemicals, leather pulp and paper, and metal plating. Sewage
waste and industrial effluents flow into lakes, canals, rivers, coastal areas and underground
sources. Since they are untreated, they endanger aquatic resources such as fish and other water
creatures and commercially important marine flora and fauna. The polluted and untreated water
causes water borne diseases such as diarrhea, hepatitis, gastro-enteritis, trachoma, etc.
3. Solid and hazardous wastes
Solid wastes also create air and water pollution in urban areas. Unregulated urban growth
without such facilities as collection, transportation, treatment and disposal of solid wastes
pollutes the atmosphere and water resources. Rotting garbage and blocked drains spread
communicable diseases and pollute ground water resources.
4. Deforestation
Deforestation also causes environmental problems. It leads to felling of trees and of natural plant
growth for setting up industries and building town, roads, highways, and dams, etc. This destroys
flora and fauna. It leads to localized flooding in hilly and adjoining areas. There is loss of human
and animal life. The green landscape changes into factors, residential and commercial buildings.
They produce more heat, noise and pollution, which bring environmental degradation and
ultimately results in death of human and cause of birth defects and genetic mutations.
5. Soil degradation
Soil degradation is another environmental problems; it is caused by water and wind.
Soil erosion in hilly areas is caused by rain and rivers, leading to landslides and floods.
Deforestation, overgrazing and step forming in hilly areas further cause solid erosion. Water
logging on irrigated lands and intensive agriculture lead to salination and solid degradation.
Areas in the proximity of deserts suffer from wind erosion caused by expression of desert, dust
storms, and whirlwinds. All types of solid degradation reduce solid fertility.
6. Loss of biodiversity
Every country is endowed with unique phyto-geographical and agro-ecological diversity
comprising of a wide variety of agro climate zones and plenty of plant and animal species. The
biodiversity is found in forests, grasslands, mountains, wetlands, deserts and marine ecosystems.
Economic growth leading to expansion of agriculture, needless exploitation of forests and
23

mineral wealth and development of prospects in biodiversity area has had to the destruction of
habitats. Consequently there has been extinction of plant, animal and microbiological s** and
loss of genetic resources.
4.5 Causes of Environmental Degradation
Environmental degradation is caused by such diverse factors as poverty, rural development,
urbanization etc.
1. Poverty
Poverty is both the cause and effect of environmental degradation. Poverty encourages
unsustainability because the poor use and deplete more natural resources than others because
they have any access to them. They work for sustenance on land and water and in mining and
forests. On the other hand, degraded environment generates more poverty because the poor
depend directly on natural resources for their livelihood.
2. Agricultural development
Agricultural development in underdeveloped countries has been a major factor in environmental
degradation. Intensive farming and excessive use of fertilizers and pesticides has led to over
exploitation of land and water resources. These have led to land degradation in the firm of soil
erosion, water logging and salination.
3. Industrialization
To industrialize rapidly, underdeveloped countries are causing environmental degradation. The
establishment of such industries as fertilizers, iron, and steel, chemicals, refineries, etc has led to
land, air and water pollution. The use of fossil fuel, minerals and timber as sources of industrial
energy is depleting these natural resources and degrading natural eco-systems.
4. Transport development
Underdeveloped countries are developing transport facilities for the expansion of trade and
commerce. However, they are also bringing about environmental degradation in the form of air
pollution, noise pollution and sea pollution. The development of ports and harbours have led to
oil spills from ships and adversely affected fisheries, coral reefs, mangroves, and landscape.
5. Urbanization
Rapid and unplanned urbanization has led to degradation of urban environment. Slums and
shantytowns pollute air and water and generation of solid hazardous wastes have contributed to
environmental degradation on a vast scale.
6. Foreign indebtedness
Indebtedness causes of environmental degradation in undeveloped countries. In order to repay
their debt, they produce commercial crops for export that displace subsistence crops which are
subsequently grown on marginal lands. They also export minerals by exploiting them needlessly,
thereby depleting them at a great cost to future generations.

24

7. Market failure
It means poor functioning of markets for environmental goods and services. it reflects failure of
government policy in removing market distortions created by price controls and subsidies.
Market failure, also called externalities, is caused by lack of individual property rights and
jointness in either production or consumption. For instance, individual farmers living in hilly
areas cause soil degradation through forestation and overgrazing of land that flood areas of
people living in lower areas. Negative externalities in form costs and adverse effects on people in
lower areas, are not considered by the inhabitants of hilly areas. The effects of such
environmental degradation are not controlled by market forces; hence, they reflect marketing
failure.
4.6 Policies for Sustainable Development
Agricultural and industrial development, along with urbanization and spread of infrastructure,
has led to environmental degradation. Environmental degradation harms human health, reduces
economic productivity and leads to the loss of amenities. The damaging effects of economic
development on environmental degradation can be reduced b a judicious choice of economic and
environmental policies and environmental investments. Choice between policy and investments
should aim at harmonizing economic development with sustainable development.
Some policy measures include:
1. Reducing poverty
Such development projects should be started which provide greater employment opportunities to
the poor. The government should expand health and education services to reach the poor. Further,
making investments in providing civic amenities like the supply of drinking water, sanitation
facilities, alternative habitats in place of slums, etc will not only improve ** but also
environment.
2. Removing subsidies
To reduce environmental degradation, subsidies for resource use by the private and public sectors
should be removed. Subsidies on the use of electricity, fertilizers, pesticides, diesels, petrol, gas,
irrigation water, etc, lead to their wasteful use and environmental problems. Subsidies of capital
intensive and highly polluting private and public industries lead to environmental degradation.
Removing or reducing subsidies will bring both economic and environmental benefits to the
country.
3. Clarifying and extending property rights
Lack of property rights over excessive use of resources leads to degradation of environment. This
leads to overgrazing of common or public lands, deforestation, and over exploitation of minerals,
fish etc. Clarifying and assigning ownership titles and tenurial rights to private owners will solve
environmental problems. Places where the use of common lands, forests, irrigation systems,
fishers, etc and regulated and rules for their proper use are laid down by the community, the
ownership rights should be clearly specified in the administrative records.
25

4. Market based approaches

Besides regulatory measures, there is urgent need for adopting market-based approaches for the
protection of environment. They aim at pointing to consumer and industries about the cost of
using natural resources on environment. These costs are reflected in the prices for goods and
services so that, industries and ultimately the consumers, are guided by them to reduce air and
water pollution.
The market based instruments (MBIs) approach is used in both developed and developing
countries; MBIs are of two types.
(i)
Quantity based and
(ii)
Price based
They are in the form of environmental taxes that include
Pollution charges (emission tax/pollution tax)
Marketable permits
Depositor fund system
Input tax/product charges
Differential tax rates
User administrative charges
Subsidies for pollution abatement equipment for air and water resources.
5. Regulatory policies
Regulatory policies also help in reducing environmental degradation. Regulators have to make
decisions regarding price, quantity and technology. In making decisions, they have to choose
between the quantity or the price of pollution or resource use or technologies. The regulating
authority has also to decide whether policies should target the environmental problem directly or
indirectly. It lays down technical standards, regulations and charges on air, water and land
pollutants. Regulators should be impartial in applying environmental standards to both public
and private sector pollution or resource users.
6. Economic incentives
Like regulatory poling, economic incenting relate to price, quantity and technology. Incentives
are usually in the form of variable fees to resource users for the quantity of pollution in air, water
and land use. They are given rebates, if less waste or pollution is generated then the emission
standards laid down.
7. Trade policy
In relation to environment trade policy has implcations
i.
Concerning domestic policy reforms and
ii.
Relating to international trade policy
Domestic trade policy emphasizes on the establishment of less polluting industries away from
the cities and the use of environmental friendly processes for polluting industries by adopting
cleaner technologies. As regards the relation between international trade and environmental
quality, controversy has been going on as to whether liberalized trade causes environmental
26

degradation. The controversy leads to the conclusion that overall, trade liberalization is likely to
produce negative environmental externalities, but also some environmental gains. The former
does not imply that free trade should be stopped. Rather, such cost-effective policy should be
adopted that optimize externalities. Environmental degradation from free trade should be reduced
by strict domestic policy measures based on the polluter pays principle. It is better to insist on
the foreign companies to transfer clean technology and assist in cleaning the environment for
existing industries.
8. Public privatization
Public awareness and participation are highly effective to improve environmental conditions.
Conducting of formal and informal education programmes relating to environmental
management and environmental awareness can go a long way in controlling environmental
degradation and keeping the environment clean. For instance, the scheme of eco-labeling of
products helps consumers to identify products that are environment friendly.
Public participation can also render costless and useful assistance in afforestation, conservation
of wildlife, management of parks, improvements of sanitation and drainage systems and flood
control. Use of indigenous institutions and local voluntary organizations can render much help in
educating the masses about the harmful effects of environmental degradation and the benefits of
keeping the environment clean.
9. Participation in global environmental efforts
There are many international conventions and agreements on environmental protection and
conservation, which every country is expected to follow. They include the Montreal Protocol
regarding the phasing out of ozone-depleting chemicals; the Basel Convention which relates to
the control of the trans-boundary movement and disposal of hazardous wastes, etc.
4.7 Measuring Sustainable Development
Measuring sustainable development is a difficult task which involves the valuation of
environmental damage and comparing it with the costs of preventing it. There are also the
problems of measuring the capital stock needed for sustainable development, of natural resource
accounting, and the use of an appropriate discount rate for maintaining optimal balance between
the use and preservation of natural resources.
1. Measuring natural capital stock
The stock of natural resource assets or environmental assets include soil fertility, forests,
fisheries, the capacity to assimilate waste, oil, gas, coal, the ozone layer and biogeochemical
cycles. The necessary condition for sustainable development is that the natural capital stock
should be conserved and improved. This is interpreted to mean that the natural capital stock
should remain at least constant. This can be measured in terms of the cost-benefit analysis of
changes in the natural capital stock.
2. Natural resource (or green) accounting
27

This approach permits the computation of income for a nation by taking into account the
economic damage and depletion in the natural resource base of an economy. It is a measure of
sustainable income level that can be secured without decreasing the stock of natural assets. This
requires the adjustment of the system of national income accounts in terms of stock of natural
assets.
3. Measuring environmental value
This entails evaluating environmental damage and improving it with the cost of preventing it. It
concerns comparing the benefits of environmental protection with the costs incurred on it.
Four approaches for economic valuation of environmental damage include:
i)
Market prices
ii)
Costs of replacement
iii)
Surrogate marketsthis relates to the effects of environmental damages on other
iv)

markets such as property values and wages of workers are also evaluated.
Surveys

Social discount rate

Environmental degradation leads to costs and environmental improvements (i.e., counter
benefits) on resource users. The problem is how to measure costs and benefits of environmental
effects on the present and the future generations. A rate of discount is needed for discounting all
costs and benefits.

28

Topic Five: DEVELOPMENT ECONOMICS IN RETROSPECT

Over the past 50 years, development economics has undergone many changes. The emphasis has
shifted from growth in gross national product (GNP) per capita to the creation of employment, to
redistribution of income, to basic human needs, to structural adjustment and sustainable
development.
5.1 GNP Per Capita (output or growth approach)
In the 1950s, economic development had been identified with the growth of GNP /GNP per
capita. The UN resolution set the target growth rate of 5% in GNP of the less developed
countries (LCDs) for the development decade of the 1960s. To achieve the targeted growth rate,
economists in LCDs suggested rigid industrialization along with urbanization. This view was
based on Rostows thesis of stages of growth, whereby development proceeded along a linear
path through a member of stages. The problems of poverty, unemployment, and income
distribution were given secondary importance. It was believed that the gains from growth of
GNP per capita would automatically trickle down to the poor in the form of increased
employment and income opportunities.
The criticism against GNP as an index of economic development gained momentum among
economists in the 1960s. Although the primary development objective of a 5% annual growth in
GNP was achieved in the first development decade (1950s), the relatively high rate of growth in
GNP did not bring satisfactory progress in development. At the end of the decade, development
in the LDCs was characterized by common malnutrition, widespread illiteracy, low life
expectancy, high infant mortality, endemic and growing unemployment, and severely skewed
redistribution of income and wealth.
5.2 Employment Creation Approach
From the 1970s, the emphasis shifted from the growth rate in GNP to the quality of the
development process; of progressive reduction in absolute poverty, unemployment and
inequalities. Attention in the development process was given to three different but
complementary strategies of (i) increasing employment, (ii) reducing inequalities in income and
wealth and (iii) meeting basic human needs.

29

5.2.1 Employment Creation Strategy

During the 1950s and 1960s, the LDCs had high rates of growth of industrial production and
economic growth, but these rates failed to create enough employment. This process would
increase inequalities in the early stages of growth process gains momentum, the rural
unemployment workers would be absorbed in the modern capitalist sector and both
unemployment and inequality would be recurred. So employment became a major policy issue of
LCDs and international agencies since in the 1970s.
Arthur Lewis in 1954 advocated that the problem of unemployment in LCDs would be solved
automatically with the movement of the subsistence and landless laborers to the higher-wage
urban capitalist industries. This process would increase inequalities in the early stages of growth
but when the growth process gained momentum, the rural unemployed workers would be
absorbed in the modern capitalist sector and both unemployment and inequalities would be
removed. The Lewis view continued to prevail in LCDs for almost two decades, but it failed to
solve the problem of unemployment due to three reasons: (i) population and labour force grew at
a faster rate than expected, (ii) the gap between the capitalist wage and the subsistence wage was
much higher than assumed by Lewis due to wage differential and trade union influences in urban
areas, and (iii) the LCDs adopted labour-saving technologies in the urban capitalist sector which
increased output per man without creating additional jobs.
The emphasis to the employment problem shifted from the output and/or growth approach to
income and poverty approach which laid emphasis on the quality rather than on the quantity of
employment. Industrial development (output/growth) having failed to provide large employment
opportunities, increasing attention was paid on the adoption of employment generating schemes
directed specifically towards the urban and rural poor so as to increase their productivity and
incomes.
5.2.2 Income Inequality (or income distribution) Strategy
In the 1950s and 1960s, the thinking on income inequality and development was influenced by
Kuznets inverted U-shaped curve; based on the experience of the developed countries that there
was, historically, a tendency for income inequality to increase first, and then to be reduced as
countries developed from a low level. Accordingly, it was believed that a high degree of
inequality in the distribution of income had a favourable effect on economic growth in the early
30

stage of development and as development gained momentum its benefits would automatically
trickle down to the lower income groups over the long run. So, this development approach
emphasized the maximization of the growth rate of the economy by building up capital,
infrastructure and productive capacity of the economy and leaving the distribution of income
untouched.
Arthur Lewis was the principal supporter of this development strategy. He outlined the process
through which income inequalities led to the economic growth of the 19 th century England, 19th
century Western Europe and the early 20th century Japan. He advocated the same for LDCs. A
number of empirical studies revealed that income inequalities had widened in the majority of
LCDs and that the living standards of the very poorest in such countries had declined both in
absolute and relative term.
5.2.3 Basic Human Needs Strategy
Dissatisfied with growth, employment and income distribution approaches to development,
economic thinkers turned towards the basic human needs strategy of promoting human wellbeing, especially that of the poor. At the World Employment Conferences of 1976, International
Labour Organization (ILO), espoused the concept of a basic needs strategy. The basic human
needs strategy, laid emphasis on providing basic material needs in terms of health, education,
water, food, clothing and shelter. The basic needs strategy had three components: (i) it aimed at
raising productivity and incomes of the rural and urban poor in LDCs through labours-intensive
production techniques, (ii) it emphasized the removal of poverty by providing basic public
services such as education, drinking water and health, and (iii) financing such public services by
the government.
In actuality, the focus was only on the second component the delivery of basic public services.
The basic needs strategy was criticized as a prescription to count, cost and deliver, i.e., count
the poor, cost the number of public services, and deliver them to the poor. It was thus, regarded
as state action from top to bottom. It was also criticized for not providing the poor with
productive assets and capital.

31

5.3 Stabilization and Structural Adjustment Approach

In the early 1980s, the decline in the growth rate of developed countries, the rise in oil prices, the
debt crisis in developing countries and the work worsening of their term of trade pushed the
basic needs strategy in the background. Many countries embarked on programs of stabilization
and structural adjustments. Initially, stabilization measures, supported by the IMF and World
Bank, aimed at reducing inflation, both budget and trade deficits, cutting public spending,
reducing wages and raising interest rates. But these measures often led to recession in some
countries and were short-term. Goaded by World Bank and IMF, many developing countries
switched to long-term structural adjustment and programme. It is a domestically designed
programme of reforms by following the policies of liberalization, adjustment and privatization.
These involve reducing the rate of the state, removing subsidies, literalizing prices and opening
economies to flows of international trade and finance; these often include measures to reduce
fiscal deficit. Structural adjustment led to reduction in government spending on social services
such as health and education in majority of the LDCs. Poverty and unemployment increased and
the concern for the poor pushed into the background.
5.4 Human Capabilities
During the structural adjustment, the concept of promoting human capabilities was emphasized
by Sen. According to the human capabilities concept, at the core of human well-being is freedom
of choice by enhancing peoples capabilities for attaining higher standards of health, knowledge,
self-respect and ability to participate actively in community life. The standard of living of a
society should not be judged by GNP per capita and the supply of particular goods but by
peoples capabilities. The human capabilities concept has been criticized on the following
grounds: (i) the freedom of choice go beyond economic development when freedom from
servitude, freedom from religion, and political freedom are included, and (iii) the problem of
measuring each of these items. The relevant capabilities are:
i. Being free from starvation, from hunger, from undernourishment.
ii. Participation in communal life.
iii. Being adequately sheltered, etc.
The expansion of these capabilities implies freedom of choices: political, social, economic and
cultural freedom.
32

5.5 Human Development

UNDP adopted the human capabilities concept. According to UNDP, human development goes
far beyond income and growth to cover all human capabilities; the needs, aspirations and choice
of the people. It defined human development as a process of enlarging peoples choices that is
created by expanding human capabilities. Income is one of the choices but it is not the only
choice; rise in income is not the same thing as the increase in human capabilities. Besides higher
income, poor people put a high value on adequate nutrition, access to safe drinking water, better
medical facilities, better schooling for their children, affordable transport, adequate shelter,
secure livelihoods and productive and satisfying jobs.
Human development is a broad and comprehensive concept. It is as much concerned with
economic growth as with its distribution, as with basic human needs as with variety of human
aspirations, as with the distress of rich countries, and a with the human deprivation of the poor.
There is relationship between economic growth and human development but there is no
automatic link between the two. Economic growth is important because no society has been able
to sustain the well-being of its people without continuous growth. So, economic growth is
essential for human development; but human development is equally important because it is the
healthy and executed people who contribute more to economic growth through productive
employment and increase in income. Thus, human development and economic growth are
closely connected. In reality, economic growth is a means to an end, and the end is human
development. Policy makers should, therefore, pay more attention to the quality of growth so as
to support all-round human development.
5.6 Sustainable Development
In 1987, the World Commission on Environment and Development (Bruntland Commission)
used a new concept of sustainable development. It defined the term sustainable development
as meeting the needs of the present generation without compromising the needs of the future
generation.
Economic development must be sustainable which means it should keep going. The concept of
sustainable development emphasizes the creation of his sustainable improvements in the quality
of life for all people as the principle goal of the development policy. This entails:
33

i.
ii.
iii.
iv.
v.

Increasing economic growth and meeting basic needs.

Bettering peoples healthy and educational opportunities.
Giving everyone the chance to participate in public life.
Helping ensure a clean environment
Promoting inter-generational equity.

Thus, meeting the needs of the people in the present generation is essential in order to sustain the
needs of future generation.

34

Topic Six: ECONOMIC GROWTH AND INCOME DISTRIBUTION

6.1 The Inverse U-shaped Hypothesis
There has been much controversy among economists over the issue whether economic growth
Increase
s
income distribution

Decreas
es

Kuznets is the first economist to study this problem empirically. He observed that relative
income inequality
i. Increases in the early stages of economic growth.
ii. Stabilizes for a time.
iii. Then, declines in the later stages.
Relative income inequality

Economic growth (development)

This is known as the inverted U-Shaped hypothesis of income distribution.
6.2 Measuring Income Inequality
6.2.1 Relative Income Inequality in Various Countries in 1950s
India
LC
DS

UK

Ceyclon

DCS

US

PuertoR
RicoS

Country

Income share %
Poorest 60%

Richest 20%
35

Ratio=Richest20%/
Poorest 60%

India (1949-50)

28

55

1.96

Ceylon (1950)

30

50

1.67

Puerto Rico (1948)

24

56

2.33

UK (1950)

34

44

1.29

US (1947)

36

45

1.25

Poorest
In LDCs, 60% of the poorest received 30% and less of national income. In DCs, the 60% of the
poorest received more than 30% of national income.
Richest
In LDCs, 20% of the richest received 50% and more of national income. In DCs, 20% of the
riches received 45% and less of national income.
Conclusion
The size distribution of income was more unequal in LDCs than in DCs. It was high (1.67 to
2.33) in LDCs and low (1.25 to 1.29) in DCs.
6.2.2 Measuring of the Degree of Income Inequality
This entails showing the size distribution of income (income inequalities). Two approaches
include:
1. Use of Lorenz curves
Percentage of populationhorizontal axis; Percentage of incomevertical axis
D
Line of
complete
equality

% of
income

A
36
O

% of
populati

B
C

The 45o straight line OD is of equal income distribution. The curve nearer to this straight line is
the Lorenz curve of DCs; the dotted curve further to right represents the Lorenz curve of LDCs.
2. Use the Gini coefficient of distribution
Example for DCs, the Gini coefficient = 0.37; for LDCs, the Gini coefficient = 0.45
The Gini coefficient of income distribution is a better measure of income inequality. It varies
from zero (complete equality) to one (complete inequality). The larger the coefficient, is the
greater the inequity. The Gini coefficient is measured in the figure above as the
Ratio of area

or

The greater is this ratio, the more unequal is the distribution of income, i.e. the more the Lorenz
curve falls below the 450 straight line.
In the figure, the area A covered by the nearer Lorenz curve to the straight line roughly
represents to 37% of the triangle OCD for DCs and the area covered by the dotted Lorenz curve
represents roughly 44% of the area of the triangle OCD for LDCs.
The changes in the distribution of income as measured by the Gini coefficient in relation to the
increase in per capita income trace out the invested U-Shaped curve, K, as shown in the
following figure.
0.70

Gini
coefficient

0.60
0.50
0.40
0.30

37
K

0.10
0

Per capita income

Income inequality falls at the increase in per capita income at higher levels of development;
implying that the inverted U-Shaped curve hypothesis applies to the present developed and
developing countries but the degree of inequality in the latter is greater than in the former.
6.3 Inequality and Development
6.3.1 Causes of Increase in Inequality with Development
There are many factors which tend to increase relative income inequality in early stages of
development in LDCs. LDCS are characterized by

Geographic
Social
Financia
l

dualism
When the process of transition Technological
from a traditional agricultural society to modern industrial
economy begins, it increases inequalities in income distribution. There are structural changes
which lead to: increasing employment opportunities, exploitation of new resources, and
improvement in technology. All these lead to increase in per capita income in the industrial
sector but income per capita of workers engaged in agricultural and non-agricultural occupations
in rural areas does not rise due to subsistence agriculture, defective land tenure system and rural
backwardness.

38

The industrial sector uses capital-intensive techniques which absorbs only educated, skilled and
trained workers. Workers in these sectors have high incomes at employers earn large profits.
Thus, the modern industrial sector grows faster than the rural subsistence sector. As a result, the
relative there of income and profit in national income of industrial sector rises more than in the
rural sector.
The migration of rural population to urban areas does not provide gainful employment
opportunities to the uneducated and unskilled people in towns and cities. The majority of them
became vendors of fruits, vegetables, newspapers, etc, car washers, waitress porters, shop
assistants, domestic servants, etc. All such persons are underemployed and have low incomes.
Some landlords move to urban sectors and invest in urban property, stocks, bonds, etc. Such
investments bring them higher incomes than from landownership in rural areas.
Technological advance and increase in financial facilities in urban areas. A new class of
entrepreneurs emerges which leads to diversification in manufacturing, trade and business;
increase in incomes and profits of persons engaged in them. This has the implication of urban
bias in the allocation of financial resources for development on part of governments. The rural
economy remains backward with disguised unemployment and low per capita income.
Legislation relating to land reforms and other economic measures to reduce concentration of
income and wealth among the rich are not easily passed and implemented due to political
reasons. So, income inequalities increase.
6.3.2 Causes of Reduction in Inequality with Development
There are two key reasons for the decrease in inequality of income distribution when the country
reaches high income levels in later stages of development.
i.
The per capita income of the highest income groups falls because their share of
ii.

income from property decreases.

The per capita income of the lowest income groups rises when the government takes
legislative decisions with respect to education and health services, inheritance and
income taxation, social security, full employment and economic relief either to whole

groups or individuals.
As development proceeds, it sets in motion a chain of cumulative expansion in the industrial
sector, thereby leading to higher per capita income. This, in turn, increases the demand for farm
products and other products.
39

Other products of rural and backward areas which raise the per capita income of the people of
these areas; this is what Hirchman calls trickling down effects and Myrdal calls spread
effects of development.
Besides, the incomes of rural areas also increase from urban remittances and/or foreign
remittances. People belonging to rural area but working in urban areas and/or living in foreign
countries remit large sums to their dependants.

40

Topic Seven: SOME THEORIES OF ECONOMIC DEVELOPEMENT

7.1 The Classical Theory (Model) and its Limitation
Can be briefly explained as follows
Laissez-faire policy: the classical (i.e., traditional, standard, conventional, orthodox, usual, typical,
established, old) economists believe in the existence of automatic free market perfectly competitive
economy which is free from any government interference. It is the invisible hand which maximizes the
national income.
Capital accumulation, the key to progress: All classicists regard capital accumulation as the key to
economic progress. They, therefore, lay emphasis on larger savings. Only capitalists and landlords are
capable of saving, according to them. The working class is incapable of saving because it gets wages
equal to subsistence level.
Profit, the incentive to investment: According to the classicists, profits induce investment. The larger
the profits, is the greater the capital accumulation and investment.
Tendency of profits to decline: profits do not increase continuously. They tend to decline when
competition increases for larger capital accumulation among capitalists. The reason, according to Smith,
is increase in wages due to competition among capitalists; whereas, according to Ricardo, when wages
and rent rise with increase in the price of corn, profits decline.
Stationery state: All classical economists visualize the stationery state as the end of the process of
capital accumulation. When, once profits start declining, this process continues till profits become zero,
population and capital accumulation stop increasing and the wage reaches the subsistence level.
According to Smith, it is the scarcity of natural resources that finally stop growth and leads to economy to
the stationery state.
In broad outline, the classical theory of economic development may be stated thus:
Suppose an expected increase in profits brings about an increase in investment which adds to the existing
stock of capital and to the steady flow of improved techniques. This increase in capital accumulation
raises wages fund. As a result, wages rise. Higher wage induce an accelerated population growth which
causes the demand for food to rise. Food production is raised by employing additional labour and capital.
But diminishing returns to land bring about a rise in labour cost. Consequently, the price of corn goes up
and in turn rents increase, wages rise, thereby reducing profits. Reduction in profits implies reduction in
investment, retarded technological progress, diminution of wages fund and slowing down of population
growth and capital accumulation. In the classical model, the end result of capitalist development is
stagnation.... This stagnation resulted from the natural tendency of profits to fall and the consequent
chocking off of capital accumulation. When this happens, capital accumulation ceases, population
becomes constant and the stationery state sets in.
A critical appraisal of the classical model
This simple and abstract classical theory of development is not free from criticisms:
1. Ignores middle class:
The whole classical analysis was based on the socio-economic environment prevailing in Great
Britain and certain parts of Europe. It assumed the existence of a rigid division of society between
the capitalists, including landlords, and the labourers. It neglected the role of middle class which
41

2.

3.

4.

5.

6.

provided the necessary impetus to economic growth. It did not occur to them that the major
source of savings in an advanced society was the income-receivers and not the property owners.
Neglects public sector:
To the classicists, perfect competition and the institution of private property were the essential
prerequisites for economic development. They however, failed to realize the important role which
the public sector has assumed in accelerating capital accumulation in recent years.
Less importance to technology
One of the important lacunae in the classical theory is the part played by science and technology
in development. The classicists usually owned technical knowledge to be given and unchanging
overtime. But they failed to visualize the important impact that science and technology had on the
rapid economic development of the now developed nations.
Unrealistic laws
The pessimistic view of the classical economists like Ricardo and Malthus that the end result of
capitalist development is stagnation was based on two assumptions (i) application of
diminishing returns to land and (ii) the Malthusian theory of population. Rapid increase of farm
in the advanced nations has proved that the classicists underestimated the potentialities of
technological progress in counteracting diminishing returns to land. Similarly, the Malthusian
theory of population has been proved by population trends prevailing in the Western World.
Diametrically opposed to the Malthusian principle, population has not growth so fast as to
outstrip the food supply. On the other hand, agricultural productivity has been much faster than
the population growth.
Wrong notions about wages and profits
Wages have not tended to be at subsistence level. There has been a continuous increase in money
wages without a corresponding decline in profit rates. And the mature economies have not
reached the stage of economic stagnation. (Both Ricardo and Malthus have been scoffed at a false
prophets in the light of the economic development of the Western World).
Unrealistic growth progress
The classical theory assumed a stationary state in which there was change, but around a point of
equilibrium, there was progress, but steady and continuous like a tree. This is however, not a
satisfactory explanation of the process of economic growth. For economic growth, as it is
understood today, does not proceed steadily, and continuously, but by fits and starts

7.2 The Marxian Theory

Marx predicted the inevitable doom of capitalism and it was on this prediction that communism built its
edifice.
According to Marx, every societys class structure consists of the propertied and the non-propertied
classes. Since mode of production is subject to change, a stage comes in the evaluation of a society when
the forces of production come into clash with the societys class structure. Then, there comes the period of
social revolution. This leads to the class struggle, the struggle between the halves and the halve-nots,
which ultimately overthrows the whole social system.

Surplus value theory

42

Marx uses his theory of surplus value as the economic basis of the class struggle under capitalism; the
superstructure of his analysis of economic development. Class struggle is simply the outcome of
accumulation of surplus value in the hands of a few capitalists.
Capitalist, according to Marx is divided into two great protagonists: (1) the workers who sell their labour
power and (2) the capitalists who own the means of production. The labourer sells his labour for what it
is worth in the labour market, viz, for its value. And is value, like the value of any other commodity, is the
amount of labour that it takes to produce labour-power. The value of the labour-power is the value of the
means of subsistence necessary for the maintenance of the labourer, determined as the number of hours
necessary for its production.
According to Marx, the value of the commodities necessary for subsistence of the labour is never equal to
the value of the produce of that labour.
Example: a labour works 10 hours a day; if it takes 6 hours of labour to produce goods to cover his
subsistence, the labourer will be paid wages equal 6 hours of labour. The difference worth of 4 hours of
labour goes into the capitalists pocket in the form of net profits, rent and interest.
Marx calls this unpaid work surplus value. The extra labour that a labourer puts in and for which he/she
receives nothing, Marx calls surplus labour.
Capital accumulation
According to Marx, it is surplus labour that leads to capital accumulation. This surplus labour augments
the capitalists profits. The capitalists main motive is to increase the surplus value which goes to swell his
profits. He tries to maximize his profits in three ways, by:
1) Prolonging the working day in order to increase the working hours of surplus labour.
2) Diminishing the number of hours required to produce the labourers subsistence (i.e. reduction of
wages).
3) The speeding up of labour, i.e., increasing the productivity of labour.
Of the three methods, according to Marx, increase in the productivity of labour is the likely choice of the
capitalist, since the other two methods, of extending the working hours and reduction of wages, have
limitations of their own. So, in order to make improvements in the productivity of labour, the capitalists
save the surplus value, reinvest it in acquiring a large stock of capital and thus accumulate capital, i.e.,
reconvert the greatest possible portion of surplus value or surplus product into capital.
Capital accumulation and concentration involve increase in constant capital and decline in variable
capital. The rapid growth of constant capital as compared with variable capital leads to a relative decrease
in the demand for labour. This is a process of supplanting labour by machines creating an industrial
reserve army which increases as capitalism develops. The larger the industrial reserve army, the worse are
the conditions of the employed workers, since the capitalist can dismiss dissatisfied and troublesome
workers, being able to replace them from the ranks of the reserve army. Capitalists are also able to cut
down wages to a semi-starvation level and appropriate more and more surplus value. This is the law of
the increasing misery of the masses under capitalism. The rate of profits rises with the rate of surplus
value and falls with organic composition of capital.
43

Capitalist crises
In order to counteract the tendency of declining rate of profits, the capitalists increase the degree of
exploitation by reducing wages, lengthening the working day, and speed ups, etc. But since every
capitalist is engaged in introducing new labour-saving and cost-reducing devices, the ratio of labour and,
hence, the surplus value, to total output falls still further. The rate of profit declines all the more.
Production is no longer profitable. Consumption dwindles as machines displace men and the industrial
reserve army expands. Bankruptcies ensue. Every capitalist tries to dump goods in the market and in the
process small firms disappear. A capitalist crisis has begun. The ultimate cause of all economic exists,
Marx points out, is the poverty and limited purchasing power of the masses. Economic crisis appears in
the form of an over-production of commodities, acute difficulties in finding markets, a fall in prices and a
sharp curtailment of production. During the crisis, unemployment increases sharply, the wages of workers
are further cut, credit facilities break down and small layers are ruined.
A critical appraisal of the Marxian theory
Marxs theory of capitalist development has been accepted by his followers as a gospel of truth while it
has been severely criticized by opponents for the following reasons.
1) Surplus value unrealistic
The while Marxian analysis is built on the theory of surplus value; however, in the real world, we
are concerned not with values but with real tangible prices. Thus, Marx has created an abstract
and unreal value world which has made it difficult and cumbersome to understand the working of
capitalism.
2) Marx, a false prophet
No doubt socialist societies have come into existence but their evolution has not been on the line
laid down by Marx. All the communist states had been poor and are even now so, as compared to
the capitalist countries. There is no increasing misery of labour in advanced capitalist societies as
asserted by Marx. On the contrary, real wage of workers have continued to rise. The workers have
tended to income more prosperous with capitalist development. And the middle class instead of
disappearing has emerged as a dominant class.
3) Technological progress helpful in increasing employment
Marx pointed out that with increasing technological progress, the industrial reserve army
expands. But this is an exaggerated view, for the long run effect of technological progress is to
create more employment opportunities by raising aggregate demand and income.
4) Falling tendency of profits not correct
Marx contends that as development proceeds, there is an increase in the organic composition of
capital which brings about a decline in the profit rate. But Marx failed to visualize that
technological innovations can be capital-saving too, and that with a fall in capital-output ratios
and increases in productivity and total output, profits can rise along with wages.
Marxs stages of growth
Marss analysis of stages of growth is based on his materialistic interpretation of history in which he
attempts to show that all historical events are the result of a continuous struggle between different classes
and groups in society. The main cause of this struggle is the conflict between the mode of production
and the relations of production.
44

According to Marx, historically, society has passed through five different stages.
1) The primitive communal stage
2) The slave stage
3) The feudal stage
4) The capitalist stage
5) The socialist or communist stage.
7.3 Rostows Stages of Economics Growth
Rostows has sought a historical approach to the process of economic development. He distinguishes five
stages of economic growth
1) The traditional society.
2) The pre-conditions for take-off
3) The take-off
4) The drive to maturity
5) The age of high mass-consumption.
The traditional society
1. A traditional society has been defined as one whose structure is developed within limited
production functions based on Pre-Newtonian science, technology, and attitudes towards the
physical world.
This does not mean that there was little economic change in such societies. In fact,
More land could be brought under cultivation,
The sale and pattern of trade could be expounded,
Manufacturers could be developed and,
Agriculture productivity would be raised along with increase in profit and real income
But, the undeniable fact remains that for want of a regular and systematic use of modern science and
technology, a ceiling existed on the level of attainable output per head. The traditional society did
not lack inventiveness and innovations, but lacked the tools and the outlook toward the physical
world of the Post-Newtonian era.
2. Social structure of such societies was hierarchical in which family and clan connections played a
dominant role.
3. Political power was concentrated in the regions, in the hands of the landed aristocracy supported
by a large retinue of soldiers and civil servants.
4. More than 75% of the working population was engaged in agriculture. Naturally, agriculture
happened to be the main sourced of income of the state and the nobles, which was disspated on
the construction of temples and other monuments, on expensive funerals and weddings and on the
prosecution of wars.
The pre-conditions for take-off
1. The second stage is a transitional era in which the pre-conditions for sustainable growth are
created. The pre-conditions for sustainable growth were created slowly in Britain and Western
45

Europe, from the end of 15th century and beginning of the 16th century, when the Mediaeval Age
ended and the Modern Age began.
2. The preconditions for take-off were encouraged or initiated by four forces
i)
the New Learning or Renaissance
ii)
the New Monarchy
iii)
the New World
iv)
the New Religion or the Reformation
3. These forces
Led to reasoning and skepticism in place of faith and authority, brought an end to
feudalism, and led to the rise of national states.
Inculcated the spirit of adventure which led to new discoveries and inventions and
consequently the rise of the bourgeoisie, the elite, in the new mercantile cities.
Thus, these forces were instrumental in bringing about changes in social attitudes,
expectations, structure, and values.
4. The pre-conditions for sustainable industrialization, according to Rostows, have usually required
radical changes in three non-industrial sectors.
(i)
A build-up of social overhead capital, especially in transport, in order to enlarge the extent of
(ii)

the market, to exploit natural resources productively, and to allow the state to rule effectively.
A technological revolution in agriculture so that agriculture productivity increases to meet the

(iii)

requirements of a rising general and urban population.

An expansion of imports, including capital imports, financed by efficient production and
marketing of natural resources for exports.

The take-off
1. The take-off stage is the great watershed in the life of a society when growth becomes its
normal condition.., forces of modernization contend against the habits and institutions. The value
and interests of the traditional society make a decisive breakthrough; and compound interest gets
built into the societys structure; i.e., by the phrase compound interest, Rostows implies that
growth normally proceeds by geometric progression.
2. The take-off also defined by Rostows as an industrial revolution, tied directly to radical changes
in the methods of production, having their decisive consequences once a relatively short period of
time.
3. The take-off period is supposed to be short, lasting for about two decades.
4. Conditions of take off: the requirements of take-off are the following three related but necessary
conditions.
i)
A rise in the rate of productive investments from say, 5% or less to over 10% of national
ii)

income or not national product.

The development of one or more substantial manufacturing sectors with a high rate of growth
(i.e. development leading sectors).
46

iii)

The existence or quick emergence of a political, social, and institutional framework which
exploits the impulses of expansion in the modern sector and gives to growth an ongoing
character; i.e. cultural framework that exploits expansion.

The drive to maturity

1. Rostows defines the stage of the drive to maturity as the period when a society has effectively
applied the range of (then) modern technology to the bulk of its resources.
2. The drive to maturity stage is a period of long sustained economic growth extending well over
four decades characterized by:
New production techniques take the place of the old ones.
New leading sectors are created.
Rate of investment is well high over 10% of national income and,
Economy is able to withstand unexpected stocks.
The age of high mass-consumption
1. The age of high mass-consumption has been characterized by:
The migration of suburban
The extensive use of the automobile
The durable consumers goods and household gadgets
The balance of attention of the society is shifted from supply to demand, problems of production
to problems of consumption and welfare in the widest sense.
2. Three forces are discernible that tend to increase welfare in the post-maternity age.
i)
The pursuit of national policy to enhance powers and influence beyond national frontiers.
ii)
To have a welfare state by a more equitable distribution of national income through
iii)

progressive taxation; increased social security; and leisure to the working force.
Decisions to create new commercial centres and leading sectors like cheap automobiles,
houses, and innumerable electrically operated household devices, etc.

3. The tendency towards mass consumption of durable consumer goods, combined full employment
and the increasing sense of security has led to a higher rate of population growth in such
societies.
4. Historically, the US was the first to reach the age of high mass consumption in the 1920s,
followed by Great Britain in the 1930s, Japan and Western Europe in the 1950s and the Soviet
Union after the death of Stalin.
Criticism of the Rostows stages of economic growth
1) Traditional society not essential for development.
2) Pre-conditions stage may not precede the take-off stage.
3) Overlapping the stages
4) Criticism of the take-off
The take-off dates are doubtful
Possibilities of failure not considered.
47

5) The stage of drive to maturity puzzling and misleading. It contains all the features of the take-off
stage.
6) The stage of high mass-consumption not chronological.
7.4 The Big Push Theory
1. The thesis of the Big Push theory is that a big push or a large comprehensive programme is
needed in the form of a high minimum amount of investment to overcome the obstacles of
development in an underdeveloped economy and to launch it on the path to progress. The theory
states that proceeding bit by bit will not launch the economy successfully on the development path;
rather a minimum amount of investment is a necessary condition for this. It necessitates the obtaining
of external economies that arise from the simultaneous establishment of technically interdependent
industries. Thus, indivisibilities and external economies flowing from a minimum quantum of
investment are a prerequisite for launching economic development successfully.
2. Three differed kinds of indivisibilities and external economies can be distinguished.
i. Indivisibilities in the production functions especially the indivisibility of the supply of social
overhead capital.
ii. Indivisibility of demand.
iii. Indivisibility of the supply of savings.

Indivisibilities in the production functions

1. Indivisibilities in inputs, outputs, or processes lead to increasing returns. Social overhead capital
is regarded as most important
Instance of indivisibility and hence of external economies on the supply side.
The services of social overhead capital comprising basic industries like power, transport, and
communications are indirectly productive and have a long gestation period. They can not be
imported. Their installation requires a sizeable initial lump for investment.
2. Social overhead capital is characterized by four indivisibilities
i. It is irreversible in time and therefore, must precede other directly productive investments.
ii. It has a minimum durability, thus making it very lumpy.
iii. It has a long gestation period.
iv. It has an irreducible minimum industry mix of different kinds of public utilities.
These indivisibilities of supply of social overhead capital are one of the principal obstacles to
development in underdeveloped countries. Therefore, a high initial investment in social overhead capital
is necessary in order to pave the way for quick-yielding directly productive investments.
Indivisibility of demand
The indivisibility or complementarity of demand requires simultaneous setting up of interdependent
industries in underdeveloped countries. This is because individual investment projects have high risks as
low incomes limit the demand for their products.
Example
48

Suppose that 10,000 unemployed workers are engaged in one 100 factories who produce a variety of
consumer goods and spend their income on buying them. The new producers would be each others
customers and thus create market for their goods. The complementarity of demand reduces the risk of
finding a market and increases the incentive to invest. In other words, it is the indivisibility of demand
which necessitates a high minimum quantum of investment in inter-dependent industries to enlarge the
size of the market.
Indivisibility of the supply of savings
A high minimum size of investment requires a high volume of savings. This is not easy to achieve in
LDCs because of low incomes. To overcome this, it is essential that when income increases due to an
increase in investment, the marginal rate of saving should be very much higher than the average rate of
saving.
A critical appraisal of the Big Push
The big push theory has following defects:
1) Negligible economies through investment in export and import substitutes.
The main justification for a big push in investment on social overhead capital is the realization
of extensive external economies but LDCs economies realize greater economies from world trade
independently of home investment. The external economies argument for a big push losses its
justification because external economies are negligible.
2) Negligible economies even from cost-reducing investments.

3)
4)
5)
6)
7)

Even in the production of local consumer goods and most public utilities, potential external
economies can be realized in a limited way.
Neglects investment in the agricultural sector
Generates inflationary pressures
Low investment leads to large increase in output
Administrative and institutional difficulties
Not a historical fact

49

Topic Eight: SOME GROWTH MODELS

8.1 The Harrod-Domar Models
The Harrod-Domar models of economic growth are based on experiences of advanced economies
[advanced capitalist economy] and attempt to analyze the requirements of steady growth in such
economy.
Requirements of steady growth: both Harrod-Domar are interested in discovering the rate of income
growth necessary for a smooth and uninterrupted working of the economy. They assign a key role to
investment in the process of economic growth laying emphasis on the dual character of investment:
1. Investment increases income; this can be regarded as the demand effect
2. Investment augments the productive capacity of the economy by increasing its capital stock; this
can be regarded as the supply effect
Thus, so long as net investment is taking place, real income and output will continue to expand. For
maintaining a full employment equilibrium level of income from year to year (i.e., the steady state), it is
necessary that both real income and output should expand at the same rate at which the productive
capacity of the capital stock is expanding; otherwise any divergence between the two will lead to excess
or idle capacity, thus forcing entrepreneurs to curtail their investment expenditures. If full employment is
to be maintained in the long run, net investment should expand continuously. This also requires
continuous growth in real income at a rate sufficient enough to ensure full capacity use of a growing stock
of capital.
Assumptions: the models constructed by Harrod AND Domar are based on the following assumptions
1. There is an initial full employment equilibrium level of income.
2. There is the absence of government interference.
3. These models operate in a closed economy which has no foreign trade.
4. There are no lags in adjustments between investment and creation of productive capacity.
5. The average propensity to save is equal to the marginal propensity to save.
6. The marginal propensity to save remains constant.
7. The capital coefficient, i.e., the ratio-of capital stock to income is assumed to be fixed.
8. There is no depreciation of capital goods which are assumed to possess infinite life.
9. Saving and investment relate to the income of the same year.
10. The general price level is constant, i.e., the money income and the real income are the same.
11. There are no changes in interest rate.
12. There is a fixed proportion of capital and labour in the productive process.
13. Fixed and circulating capitals are lumped together under capital.
14. There is only one type of product.
The Domar Model
Domar builds his model around the following question: since investment generates income on the one
hand and increases productive capacity on the other, at what rate should investment increase in order to
make the increase in income equal to the increase in productive capacity, so that full employment is
maintained? He answers this question by forging a link between aggregate supply and aggregate demand
through investment.
Increase in productive capacity [aggregate supply]
Domar explains the supply side; let
I the annual rate of investment
50

sthe average annual productive capacity per dollar of newly created capital; this represents the ratio of
increase in real income or output to an increase in capital or is the reciprocal of the accelerator or the
marginal capital-output ratio
Thus, the productive capacity of I dollar invested will be I*s dollars per year
Iis the total net potential increase in output of the economy, known as the sigma effect; represents
the net potential social average productivity of investment [=Y/I]. It is the increase in output which the
economy can produce; it is the supply side of the system and is less than I*s.
Required increase in aggregate demand

Domar explains the demand side; it is explained by the Keynesian multiplier. Let
Ythe annual increase in income
Ithe increase in investment
S/Y=the propensity to save
Y=I*1/the increase in income, Y is equal the multiplier (1/) times increase in
investment (I).
Equilibrium
To maintain full employment equilibrium level of income, aggregate demand should equal
aggregate supply. Thus, the fundamental equation of the Domar model is
I*1/ = I
Solving this equation, to obtain
I/I =
This equation shows that to maintain full employment the growth rate of net autonomous
investment (I/I) must be equal to the marginal propensity to save () times the productivity of
capital (). This is the rate at which investment must grow to assure the use of potential capacity
in order to maintain a steady growth rate of the economy at full employment.
Example
Let: = 25 percent per year; = 12 percent; and Y = 150 billion dollars per year. If full
employment is to be maintained, an amount equal to 150*12/100 = 18 billion dollars should be
invested. This investment will raise productive capacity by the average productivity amount
invested, times, i.e., by 150*12/100*25/100 = 4.5 billion dollars, and the national income will
have to rise by the same amount. But the relative rise in income will equal the absolute increase
divided by the income itself, i.e.,
12
25
*
12
25 = = 3 percent
150 * 100 100
*
150
100 100

Thus, in order to maintain full employment, income must grow at a rate of 3 percent per annum.
This is the equilibrium rate of growth. Any divergence from this golden path will lead to
cyclical fluctuations. When I/I> , the economy would experience boom and when I/I< ,
the economy would suffer from depression.

51

The Harrod Model

Tries to show how steady (i.e., equilibrium) growth may occur in the economy. Once the steady
growth rate is interrupted and the economy falls into disequilibrium, cumulative forces tend to
perpetuate this divergence thereby leading to either secular deflation or secular inflation.
The Harrod model is based upon three distinct rates of growth
1. The actual growth rate represented by G which is determined by the saving ratio and the
capital-output ratio. It shows short-run cyclical variations in the rate of growth. In the
Harrodian model, the first fundamental equation is:
GC = s
where G is the rate of growth of output in a given period of time and can be expressed as
Y/Y; C is the net addition to capital and is defined as the ratio of investment to the
increase in capital, i.e., I/Y; and s is the average propensity to save, i.e., S/Y.
substituting these ratios in the above equation we obtain
Y/Y*I/Y = S/Y OR I/Y = S/Y OR I = S
i.e., saving = investment
2. The warranted rate of growthis the rate at which producers will be content with what
they are doing; it is the entrepreneurial equilibrium; it is the line of advance which, if
achieved, will satisfy profit takers that they have done the right thing. This growth rate is
primarily related to the behavior of businessmen. At the warranted rate of growth,
demand is high enough for businessmen to sell what they have produced and they will
continue to produce at the same percentage rate of growth. Thus, it is the path on which
the supply and demand for goods and services will remain in equilibrium, given the
propensity to save. The equation for the warranted rate is:
GwCr = s
where Gw is the warranted rate of growth or the full capacity rate of growth of income
which will fully utilize a growing stock of capital that will satisfy the entrepreneurs with
the amount of investment actually made; it is the value of Y/Y. Cr, the capital
requirements, denotes the amount of capital needed to maintain the warranted rate of
growth, i.e., required capital-output ratio; it is the value of I/Y, or C. s is the same as in
the first equation, i.e., S/Y. The equation states that if the economy is to advance at a
steady rate of Gw that will utilize its capacity, income must grow at the rate of s/Cr per
year, i.e., Gw = s/Cr. if income grows at the warranted rate, the capital stock of the
economy will be fully utilized and entrepreneurs will be willing to continue to invest the
amount of saving generated at full potential income. Gw is therefore a self-sustaining rate
of growth and if the economy continues to grow at this rate it will follow the equilibrium
path.
At full employment growth, the actual growth rate of G must equal Gw, the warranted rate
of growth that would give steady advance to the economy and Cr, the actual capital
goods, must equal Cr, the required capital goods for the steady growth. If G and Gw are
not equal, the economy will be in disequilibrium. For instance, if G> Gw, the C will be
52

less than Cr; shortages will result. There will be insufficient goods in the pipeline and/or
insufficient equipment; such a situation leads to secular inflation because actual income
grows at a faster rate than that allowed by the growth in the productive capacity of the
economy. It will further lead to a deficiency of capital goods, the actual amount of capital
goods being less than the required capital goods (C< Cr). Under the circumstances,
desired investment would be greater than saving and aggregate production would fall
short of aggregate demand. There would thus be chronic inflation. This is illustrated in
panel (A) where starting from the initial full employment level of income, Y0, the actual
growth rate G follows the warranted growth path Gw, upto point E through period t2; but
from t2 onwards, G deviates from Gw and is higher than the latter. In subsequent periods,
the deviation between the two becomes larger and larger.
(A)

(B)

Growth rates
G
E

Gw

Y0

E
Y

t2
Time
t2
If, on the other hand, G<Gw, then C is greater than Cr. such a situation leads to secular
depression because actual income grows more slowly than what is required by the
productive capacity of the economy leading to an excess of capital goods (C> Cr). This
means that desired investment is less than saving and that the aggregate demand falls
short of aggregate supply. The result is a fall in output, employment and income. There
would thus be chronic depression; this is illustrated in panel (B) when from period t2
onwards G falls below Gw, and the two continue to deviate further away.
3. The natural rate of growthit is the rate of advance which the increase of population
and technological improvements allow. The natural rate of growth depends on the macro
variables like population, technology, natural resources and capital equipment; in other
words, it is the rate of increase in output at full employment as determined by a growing
population and the rate of technological progress. The equation for the natural rate of
growth is
Gn*Cr = or s
Here Gn is the natural or full employment rate of growth
Divergence of G, Gw and Gn.
For full employment equilibrium growth Gn = Gw = G. Once there is any divergence between
natural, warranted and actual rates of growth conditions of secular stagflation or inflation would
be generated in the economy.
53

If G>Gw, investment increases faster than saving and incomes rise faster than Gw. If G<Gw,
saving increases faster than investment and rise of income is less than Gw. thus, Harrod points
out that if Gw>Gn, secular stagflation will develop. In such a situation, Gw is also greater than G
because the upper limit to the actual rate is set by the natural rate as shown in panel (A). When
Gw exceeds Gn, C> Cr and there is an excess of capital goods due to shortage of labour. The
shortage of labour keeps the rate of increase in output to a level less than Gw. machines become
idle and there is excess capacity. This further dampens investment, output, employment and
income. Thus, economy will be in the grip of chronic depression. Under such conditions saving
is a vice.
If Gw>Gn, Gw is also less than G as shown in panel (B). The tendency is for secular inflation to
develop in the economy. When Gw<Gn, C< Cr. There is a shortage of capital goods and labour is
plentiful. Profits are high since desired investment is greater than realized investment and the
businessmen have a tendency to increase their capital stock. This will lead to secular inflation. In
such a situation saving is a virtue for it permits the warranted rate to increase.
Limitations of Harrod-Domar models
The crucial assumptions made by Harrod and Domar make these models unrealistic
1. The propensity to save ( or s) and the capital-output ratio () are assumed to be constant.
In actuality, they are likely to change in the long run and thus modify the requirements
for steady growth. A steady rate of growth can, however, be maintained without this
assumption.
2. The assumption that labour and capital are used in fixed proportions is untenable.
Generally, labour can be substituted for capital and the economy can move smoothly
towards a path of steady growth.
3. The two models also fail to consider changes in the general price level. Price changes
always occur over time and may stabilize otherwise unstable situations.
4. The assumption that there are no changes in interest rates is irrelevant to the analysis.
Interest rates change and affect investment a reduction in interest rates during periods of
overproduction can make capital-intensive processes more profitable by increasing the
demand for capital and thereby reduce excess supplies of goods.
5. The Harrod-Domar models ignore the effect of government programmes on economic
growth. If for instance, the government undertakes a programme of development, the
Harrod-Domar analysis does not provide us with causal (functional) relationship.
6. It also neglects the entrepreneurial behavior which actually determines the warranted
growth rate in the economy. This makes the concept of the warranted growth rate
unrealistic.
7. The Harrod-Domer models have been criticized for their failure to draw a distinction
between capital goods and consumer goods.
8. The primary source of instability in the Harrods system lies in the effect of excess
demand or supply on production decisions and not in the effect of growing capital
shortage or redundancy on investment decisions.
54

8.2 The Solow Model of Long-Run Growth

Solow builds his model of economic growth as an alternative to the H-D model
without its crucial assumption of fixed proportions in production; Solow postulates a
continuous production function linking output to the inputs of capital and labour
which are substitutable.
Assumptions
1. One composite commodity is produced.
2. Output is regarded as net output after making allowance for the depreciation
of capital.
3. There are constant returns to scale; in other words, the production function is
homogeneous of the first degree.
4. The two factors of production, labour and capital, are paid according to their
marginal physical productivities.
5. Prices and wages are flexible.
6. There is perpetual full employment of labour.
7. There is also full employment of the available capital stck.
8. Labour and capital are substitutable for each other.
9. There is neutral technical progress.
10.The saving ratio is constant.
Given these assumptions, Solow shows in his model that with variable technical
coefficient there would be a tendency for capital-labour ratio to adjust itself through
time in the direction of equilibrium ratio. If the initial ratio of capital to labour is
more, capital and output would grow more slowly than labour force and vice versa.
Annual rate of production of output is designated as Y(t) representing the real
income of the community, part of it is consumed and the rest is saved or invested;
that which is saved is a constant, s, and the rate of saving is s*Y(t); K(t) is the
capital stock, and net investment is the rate of increase of this stock of capital, i.e.,
dk/dt or

K ; so the basic identity is

K = sY
.

(1)

Since output is produced with capital and labour, technological possibilities are
presented by the production function
Y = F(K, L), that shows constant returns to scale
(2)
Thus,
.

= sF(K, L), L represents total employment

(3)

Since population is growing exogenously, the labour force increases at a constant

relative rate, n. thus,
L(t) = L0 ent
(4)
The rhs of this equation shows the compound rate of the growth of labour force from
period 0 to t; the equation can be regarded as a supply curve of labour. It says that
the exponentially growing labour force is offered for employment completely
inelastically. The labour supply curve is a vertical line which shifts to the right in
time as labour force grows according to this equation; then the real wage adjusts so
55

that all available labour is employed, and the marginal productivity equation
determines the wage rate which will actually rule. Insert equation (4) in (3), to
obtain the basic equation of the Solow model
.

= sF(K, L0 ent )

(5)

The basic equation determines the time path of capital accumulation,

K , that

must be followed if all available labour is to be fully employed. It provides the time
profile of the communitys capital stock which will fully employ the available labour.
Once the time paths of capital and labour are known, the corresponding time path
of real output can be computed from the production function.
The Solow model sums the growth process as follows:
At any moment of time the available labour supply is given by equation (4) and the
available capital stock is also known. Since the real return to factors of production
will adjust to bring about full employment of labour and capital, we use the
production function of equation (2) to fnd the current rate of output. Then the
propensity to save tells us how much of net output will be saved and invested.
Hence, we know the net accumulation of capital during the current period; added to
the already accumulated stock this gives the capital available for the next period,
and the whole process can be repeated.

56

Topic Nine: [ROLE AND LIMITATION OF] DEVELOPMENT PLANNING AS

PRACTISED IN LDCs
9.1 Since the WWII, the pursuit of economic development among the LDCs has been
characterized by their acceptance of development planning as the surest and most
direct route to economic progress. Planning has become a way of life in the
government ministries of most LDCs.
9.1 The Nature of Economic Planning
Economic planning may be described as the conscious governmental effort to
influence, direct and even control changes in the principal economic variables [e.g.,
consumption, investment, savings, exports, imports, etc] of a certain country or
region over the course of time in order to achieve a predetermined set of objectives.
The essence of economic planning is summed up in these notions of governmental
influence, direction and control. We can describe an economic plan as a specific
set of quantitative economic targets to be reached in a given period of time.
Economic plans may be either comprehensive or partial. A comprehensive plan
sets its targets to cover all major aspects of the national economy. A partial plan
covers only a part of the national economy: industry, agriculture, the public sector,
the foreign sector, etc.
Proponents of economic planning in LDCs argue that the uncontrolled market
economy can, and often does, subject these nations to economic stagnation,
fluctuating prices and low levels of employment. In particular, they claim that the
market economy is not geared to the principal operational task of poor countries:
how to mobilize limited resources in a way that will bring about the structural
change necessary to stimulate a sustained and balanced growth of the entire
economy. Planning has come to be accepted, therefore, as an essential and pivotal
means of guiding and accelerating economic growth in all the LDCs.
The various aspects and characteristics of economic planning as practiced in
different situations and different stages of economic maturity in the worlds
economies may be distinguished among three fundamental but distinct types of
economic planning.
Planning in market economies
[these are predominantly private enterprise economies like those of the US, the UK
and Japan]. In these economies, planning plays a vital although relatively indirect
role in the economic process. In the context of these economies, planning usually
consists of the conscious effort by the government to attain rapid economic growth
with high employment and stable prices through its various fiscal and monetary
policies. Recognizing that the completely unregulated play of the market
mechanism can lead to highly unstable economic situations, these governments
actively attempt to create conditions that will prevent economic instability while
stimulating economic growth. The policy instruments used are primarily those in the
fields of monetary, fiscal and foreign trade relations. Greater employment and
higher incomes for a growing population are induced by expansionary monetary
policy, increased government spending and tax rate adjustments. Inflation and
deflation are held in check in countercyclical fiscal policies, interest rate
adjustments, exchange controls, import quotas and tax incentives. In all these
57

methods the instruments of policy are active but indirect. They are active in
that they push the economy in a desired direction; they are indirect in that they are
intended merely to create favourable conditions which will influence private
decision makers to behave in ways that are likely to promote stable economic
growth. Although no detailed economic plan in the sense of a set of specific targets
is drawn up in most market economies, limited government planning is carried out
on the basis of analysis of past trends and projections of future economic
conditions.
Planning in command economies
The second category of economic planning is associated mainly with the former
Soviet Union and those Soviet-type economies of former Eastern Europe where the
government actively and directly controlled the movements of the economy through
a central decision-making process. A specific set of targets predetermined by
central planners formed the basis of a complete and comprehensive national
economic plan. Resources, both material and financial, are allocated in accordance
not with market prices and conditions of supply and demand, as in idealized market
economies, but with the material, labour and capital requirements of the overall
plan. Thus, the essential difference between planning in market and
command economies is one of inducement versus control. While the former
merely attempts to prevent the economy from straying from a desired path of
stable growth by active but indirect instruments of policy, the latter not only draws
up a specific set of targets representing a desired course of economic progress, but
also attempts to implement its plan by directly controlling the activities of
practically all productive units in the entire national economy. In short, the
command economy plan dictates the future position of all economic variables.
Planning in mixed developing economies
The third, and for our purposes, most important example of economic planning lies
in the realm of developing planning within the framework of the mixed economies of
most LDCs. These economies are characterized by the existence of an institutional
setting in which part of the productive resources are privately owned and operated
while he other part is controlled by the public sector. The actual proportionate
division of public and private ownership varies from country to country. Unlike
market economies where there is usually only a small degree of public ownership,
LDC mixed economies are distinguished by a substantial amount of government
ownership and control. The private sector of these economies typically consists of
four distinct forms of individual ownership:
i.
The traditional subsistence sector consisting of small-scale private farms
selling their produce to local markets.
ii.
Small-scale individual or family-owned commercial business and service
activities.
iii.
Medium-sized commercial enterprises in agriculture, industry, trade and
transport owned and operated by local entrepreneurs.
iv.
Large jointly owned or completel foreign owned manufacturing
enterprises, mining companies and plantations primarily catering to
foreign markets but sometimes with substantial local sales. The capital for
58

such enterprises usually comes from abroad while, a good proportion of

the profits tend to be transferred overseas.
In the context of such institutional setting, we can identify two principal components
of development planning in mixed economies
i.
The governments deliberate utilization of domestic saving and foreign
finance to carry out public investment projects and to mobilize and
channel scarce resources into areas that can be expected to make the
greatest contribution towards the realization of long-term economic
objectives [e.g., the construction of railways, schools, hydro-electric
projects and other components of economic infrastructure, as well as the
creation of import-substituting industries].
ii.
Government economic policy [e.g., taxation, licensing, import quotas,
wage and price policy] to stimulate, direct, and in some cases, even
control private economic activity in order to ensure a harmonious
relationship between the desires of private businessmen and the social
objectives of the central government.
The Main Arguments for and against the Role of Planning in LDCs
[some of the economic and institutional reasons that have led many to conclude
that planning is necessary if the LDCs are to accelerate their pace of development].
The widespread acceptance of planning as a development tool rests on a number of
fundamental economic and institutional arguments of which the following four are
most often put forward.
i.
The market failure argument
Markets in LDCs are permeated by imperfections both of structure and
operation. Commodity and factor markets are poorly organized and existence
of distorted prices often means that producers and consumers lack the
necessary information to act in a way conducive to efficient production and
distribution. Secondly, well organized capital markets based on the existence
of specialized financial institutions performing a great variety of monetary
functions such as the channeling of private savings into loan markets to
provide capital funds to finance investment projects, are either non-existent
or poorly developed I most LDCs. In short, the inefficiency or absence of well
organized commodity, factor and capital markets is said to reduce the ability
of the LDC economic system to function effectively without some form of
external interference.
The failure of the market to price factors of production correctly is further
assumed to lead to gross disparities between social and private valuations of
alternative investment projects. In the absence of government interference,
therefore, the market is said to lead to a misallocation of present and future
resources. This market failure argument is the most often quoted for the
expanded role of government in LDCs.
ii.
The resource mobilization and allocation argument
The LDC economies cannot afford to waste their limited financial and skilled
manpower resources on unproductive ventures. Investment projects must be
chosen not only on the basis of a partial productivity analysis dictated by
59

individual industrial capital-output ratios, but rather in the context of an

overall development programme which takes account of external economies,
indirect repercussions and long-term objectives. Skilled manpower must also
be utilized where its contribution will be most widely felt. Economic planning
is assumed to help modify the restraining influence of limited resources by
recognizing the existence of particular constraints and by choosing and
coordinating investment projects so as to channel these scarce factors into
their most productive outlets. On the other hand, it is argued that competitive
markets will tend to generate less investment, to direct that investment into
socially low-priority areas, e.g., consumption goods for the rich, and to
disregard the extra benefits to be derived from a planned and coordinated
long-term investment programme.
iii.
The attitudinal or psychological argument
It is often assumed that a detailed statement of national economic and social
objectives in the form of a specific development plan can have an important
attitudinal or psychological impact on a diverse and often fragmented
population. It may succeed in rallying the people behind the government in a
national campaign to eliminate poverty, ignorance and disease. By
mobilizing popular support and cutting across class, caste, racial, religious or
tribal factions with the plea to all citizens to work together towards building
the nation, an enlightened central government through its economic plan is
thought to be best equipped to provide the incentives needed to overcome
the inhibiting and often divisive forces of sectionalism and traditionalism in a
common quest for wide-spread material and social progress.
iv.
The foreign aid argument
The formulation of detailed development plans with specific sectoral output
targets and carefully designed investment projects has often been a
necessary condition for the receipt of bilateral and multilateral foreign aid.
With a shopping list of projects, LDC governments are better equipped to
solicit foreign assistance and persuade donors that their money will be
applied as an essential ingredient in a well-conceived and internally
consistent plan of action.
Basic types of planning models
Although the formulation of a comprehensive plan is the goal of most LDCs, it is
sometimes necessary to base such plans on a more partial sectoral analysis.
Development plans are typically based on some more or less formalized
macroeconomic model. Such planning models may be divided into three categories
according to the degree of structural complexity and the particular use to which the
model is being put. They are:
i.
The aggregate growth model
The first and most elementary type of planning model, the aggregate
growth model, deals with the entire economy in terms of such
macroeconomic variables as consumption, production, investment, saving,
exports, and imports. Aggregate growth models are usually used to
determine possible growth rates of national output under simplifying
60

assumptions about savings and investment. The simplest and most

commonly used is the Harrod-Domar model which assumes that limited
savings and investment constitute the major constraint on aggregate
economic growth. The aggregate growth model usually provides only a rough
first approximation of the general directions which the economy might take.
As such, it rarely constitutes the operational development plan. In most
instances, the projection of aggregate components of GDP merely provides a
general overall framework or initial stage in the formulation of a
comprehensive plan.
ii.
The sectoral projection model
The so-called sectoral growth or projection model really comprises two
fundamentally different approaches to development planning. The first
attempts to divide the economy into two or more main-sectors such as
agriculture and non-agriculture, or the consumption-goods sector, the
investment-goods sector, and the export sector. The objective is to formulate
an internally consistent plan for the whole economy by focusing on the
growth prospects of a limited number of its principal sectors. This more
detailed approach is often called a complete main-sector planning model.
A second and less ambitious sectoral approach concentrates on levels of
production and consumption so as to investigate the possibility of growth in a
single individual sector of the economy. This approach, sometimes referred to
as a single-sector project model, analyses growth prospects in isolated
sectors of the economy, e.g., agriculture, transportation, construction, with a
view to identifying specific industrial investment projects which then might be
funded with either domestic or foreign resources. The major analytical tool
for appraising alternative sectoral investment projects is the cost-benefit
methodology. The single-sector project approach is most often undertaken in
those economies where statistical data for either an aggregate or a complete
main-sector model are lacking, but where detailed information may exist for
one or more individual sectors. The main drawback is that the development
plan, if based exclusively on a sectoral project approach, often loses its
desirable characteristics of internal consistency and overall feasibility.
iii.
The comprehensive inter-industry model
The third and most sophisticated approach to development planning is to
utilize some variant of the inter-industry or input-output model in which the
activities of all productive sectors of the economy are interrelated through a
set of simultaneous algebraic equations expressing the specific production
processes or technologies of each industry. All industries are viewed both as
producers of outputs and utilizers of inputs from other industries. Interindustry models range from simple input-output models, usually consisting of
from 10 to 30 sectors in the developing economies and from 30 to 400
sectors in advanced economies, to more complicated linear-programming or
activity-analysis models where checks of feasibility, i.e., what is best among
different alternatives, are also built into the model. The distinguishing
61

characteristic of the inter-industry or input-output approach is the attempt to

formulate an internally consistent, comprehensive development plan for the
entire economy. Unfortunately, sophisticated inter-industry models require an
inordinate amount of statistical information and are primarily applicable in
economies that have achieved a considerable degree of industrial
development as evidenced, for example, by a significant volume of interindustry transactions. They are thus of limited value for most LDCs.
Nevertheless, simple input-output models have been put to a number of
useful tasks in those developing economies which have begun to diversify
their industrial sectors.

62

Cec412Model Questions (Dr. Gabriel N. Kirori)

Introduction
1.
2.
3.
4.
5.

Distinguish clearly between the terms economic growth and economic development.
Explain briefly the various methods of measuring economic development.
Explain briefly the drawbacks of GNP as a measure of economic development.
Explain briefly the drawbacks of GNP per capita as a measure of economic development.
Discuss in detail social indicators as a method of measuring economic development.

Economics of Underdevelopment
6.
7.
8.
9.

Discuss in detail the characteristics of the LDCs [underdeveloped countries].

Explain briefly the various criteria used for defining underdevelopment.
Explain briefly the term dualistic economy as a characteristic of underdevelopment.
Explain briefly the statement technological backwardness is one characteristic of
underdevelopment.

Economic Growth and Development

A. Obstacles to Economic Development
10. Explain briefly the various obstacles to economic development.
11. Explain briefly the term vicious circles of poverty.
12. Explain briefly the social-cultural constraints to economic development..
B. Factors of Economic Growth.
13. Explain briefly the various factors of economic growth.
14. Explain in detail capital accumulation [or capital formation] as a factor of economic
growth.
15. Explain briefly natural resources as a factor of economic growth.
16. Organization is an important part of modern economic growth process; explain this
statement briefly.
17. Technological progress is regarded as one of key factors in the process of economic
growth; explain this statement briefly.
18. Explain briefly the term structural changes.
19. Distinguish clearly between the terms economic factors of economic growth and noneconomic factors of economic growth.
20. Explain briefly the term human capital formation.
21. Explain briefly the role of political and administrative factors in modern economic
growth.
C. Characteristics of Modern Economic Growth [of developed countries]
22. Explain in detail the characteristics of modern economic growth as identified by Kuznets.
23. Explain briefly factors that identify economic growth in developed countries.
63

24. Explain briefly the characteristics of modern economic growth related to national
product and population growth.
25. Explain briefly the characteristics of modern economic growth related to structural
transformation.
26. Explain briefly the characteristics of modern economic growth related to international
spread.
27. The key factors characterizing modern economic growth are national product and
population growth; structural transformation; and international spread. Explain this
statement in detail.
28. Explain in detail the role of high rate of structural transformation in modern economic
growth.
29. Explain in detail the role of urbanization in modern economic growth.
30. Explain in detail the term outward expansion of developed countries.
31. Foreign commodity trade has been a most dominant component of outward expansion of
the developed countries; explain briefly this statement.
Sustainable Development
32. Explain in detail the term sustainable development.
33. Explain briefly the meaning and objectives of sustainable development.
34. Explain briefly the environmental problems of sustainable development.
35. Explain briefly the policies for sustainable development.
36. Explain briefly the approaches for measuring sustainable development.
Development Economics in Retrospect
37. Discuss in detail the statement development economics has undergone many changes
over the past 50 years.
38. Discuss briefly the GNP per capita approach to development economics.
39. Discuss in detail the employment creation approach to development economics.
40. Discuss briefly the income and poverty approach to development economics.
41. Discuss in detail the income inequality [income distribution] approach to development
economics.
42. Discuss briefly the basic human needs strategy.
43. Discuss in detail the stabilization and structural adjustment approach to development
economics.
Economic Growth and Income Distribution
44. Explain clearly the term inverted U-shaped hypothesis of income distribution.
45. Using suitable illustrations describe briefly the approaches for measuring degree of
income inequality or changes in the distribution of income.
Some Theories of Economic Growth
46. Discuss in detail the classical model of economic growth.
64

47. Discuss briefly the Marxian model of economic growth.

48. Explain briefly the term surplus value.
49. State Rostows thesis of stages of growth.
50. Explain briefly the stages of economic growth distinguished by Rostows.
51. Explain briefly the term thesis of Big Push.
52. Explain briefly three different kinds of individualities and externalities in the Big Push.
53. State the thesis of the Big Push.
Some Growth Models
54. Explain briefly the terms
i.
Demand effects in the Harrod-Domar models.
ii.
Supply effects in the Harrod-Domar models.
55. Explain briefly the requirements of steady growth in the Harrod-Domar models.
56. State the assumptions on which the construction of the Harrod-Domar models is based.
57. State the fundamental equation of the Domar model.
58. Given: = 25 percentaverage productivity of investment; = 12 percentmarginal
propensity to save; Y = $150 millionnational income. Required to find:
i.
The amount of investment necessary to main full employment.
ii.
Equilibrium rate of growth.
59. Explain the three growth rates on which the Harrod model of growth is based.
60. Explain briefly the terms:
i.
The warranted rate of growth.
ii.
The natural rate of growth.
61. State the limitations of the Harrod-Domar models.
62. Explain briefly the distinction between Harrod-Domar models and the Solow model.
63. State the assumptions of Solow model.
Economic Development Planning
64. Explain briefly the terms:
i.
Economic planning.
ii.
Economic plan.
65. Distinguish between the terms:
i.
Comprehensive plan.
ii.
Partial plan.
66. Explain briefly the arguments by the proponents of economic planning in the LDCs.
67. Explain briefly three distinct types of economic planning as practiced in different
situations and stages of economic maturity in the world economies.
68. Explain briefly the essential difference between planning in market and command
economies.
69. Explain briefly the terms:
i.
Planning in market economies.
ii.
Planning in command economies.
iii.
Planning in mixed developing economies.
70. Explain in detail the four fundamental economic and institutional arguments for
widespread acceptance of planning as a development tool in the LDCs.
71. Explain in detail three categories of macroeconomic models on which development plans
in the LDCs are typically based.
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72. Explain briefly the terms:

i.
Aggregate growth model.
ii.
Complete main-sector planning model.
iii.
Single-sector project model.
iv.
Input-output [inter-industry] model.
73. Distinguish clearly between the terms:
i.
Complete main-sector planning model.
ii.
Single-sector project model.
74.

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